Legislature(2005 - 2006)CAPITOL 124

02/28/2006 12:30 PM RESOURCES


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12:34:37 PM Start
12:36:31 PM HB488
05:38:01 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Location Change --
+= HB 488 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
                                                                                                                              
CO-CHAIR SAMUELS announced that the  only order of business would                                                               
be HOUSE BILL  NO. 488, "An Act repealing the  oil production tax                                                               
and gas production tax and providing  for a production tax on the                                                               
net value  of oil and  gas; relating  to the relationship  of the                                                               
production  tax  to  other  taxes;  relating  to  the  dates  tax                                                               
payments  and surcharges  are  due under  AS  43.55; relating  to                                                               
interest  on  overpayments  under   AS  43.55;  relating  to  the                                                               
treatment  of  oil  and  gas   production  tax  in  a  producer's                                                               
settlement with  the royalty owner;  relating to flared  gas, and                                                               
to oil  and gas  used in  the operation of  a lease  or property,                                                               
under AS  43.55; relating to the  prevailing value of oil  or gas                                                               
under AS  43.55; providing  for tax credits  against the  tax due                                                               
under AS 43.55 for certain  expenditures, losses, and surcharges;                                                               
relating to statements or other  information required to be filed                                                               
with or furnished  to the Department of Revenue,  and relating to                                                               
the penalty for failure to  file certain reports, under AS 43.55;                                                               
relating to the  powers of the Department of Revenue,  and to the                                                               
disclosure  of certain  information required  to be  furnished to                                                               
the Department of  Revenue, under AS 43.55;  relating to criminal                                                               
penalties for  violating conditions  governing access to  and use                                                               
of  confidential   information  relating  to  the   oil  and  gas                                                               
production tax;  relating to  the deposit  of money  collected by                                                               
the  Department  of  Revenue  under AS  43.55;  relating  to  the                                                               
calculation of the gross value at  the point of production of oil                                                               
or  gas;  relating to  the  determination  of  the net  value  of                                                               
taxable oil and  gas for purposes of a production  tax on the net                                                               
value  of oil  and gas;  relating  to the  definitions of  'gas,'                                                               
'oil,' and certain  other terms for purposes of  AS 43.55; making                                                               
conforming amendments; and providing for an effective date."                                                                    
                                                                                                                                
12:36:31 PM                                                                                                                   
                                                                                                                                
RICHARD OWEN, Alaska Production Manager, ExxonMobil Corporation;                                                                
Vice President, ExxonMobil Alaska  Production, relayed that if HB
488   was  simply   a   tax   increase,  ExxonMobil   Corporation                                                               
("ExxonMobil")  would actively  oppose  it.   At current  prices,                                                               
ExxonMobil expects  its production tax payment  would increase by                                                               
$50-$100 million  per year.   However, ExxonMobil is  prepared to                                                               
move  forward  under  the  proposed   system  since  it  balances                                                               
revenues to the  State of Alaska and producers across  a range of                                                               
oil prices, provides incentives  for new investment, and includes                                                               
a transition provision for recent  investments.  He remarked that                                                               
most  importantly for  ExxonMobil, the  Petroleum Production  Tax                                                               
(PPT)  proposal provides  a predictable  and durable  tax system,                                                               
which  along with  the appropriate  gas pipeline  fiscal contract                                                               
terms will allow the Alaska  Natural Gas Pipeline project to move                                                               
forward to  the next phase.   As  far as specific  concerns about                                                               
this  bill, they  center around  whether  the high  tax rate  and                                                               
resulting increase in  taxes will hinder full  development of the                                                               
remaining oil resources on the North Slope.                                                                                     
                                                                                                                                
12:38:38 PM                                                                                                                   
                                                                                                                                
MR. OWEN  noted that  ExxonMobil has had  presence in  Alaska for                                                               
over  a half  century, investing  more  than $11  billion in  the                                                               
State of Alaska's economy.   ExxonMobil's activities date back to                                                               
1954 when it  conducted a comprehensive study  of the territory's                                                               
oil and gas potential.   Over the years, ExxonMobil explored most                                                               
of the major hydrocarbon plays in  Alaska including:  the Gulf of                                                               
Alaska,  St. George  and Navarin  Basins, Norton  Sound, Beaufort                                                               
Sea, Cook  Inlet, and of course,  the North Slope where  it was a                                                               
participant in  the 1968 Prudhoe  Bay number one  discovery well.                                                               
ExxonMobil  is proud  of  the  role it  has  played  in Alaska  -                                                               
exploration,  initial  field  development,  construction  of  the                                                               
Trans-Alaska   Pipeline  System   (TAPS),   development  of   new                                                               
technology, and  the promotion of efficient  reservoir management                                                               
practices.                                                                                                                      
                                                                                                                                
MR.  OWEN further  noted that  currently, ExxonMobil  has working                                                               
interests  in  Prudhoe Bay,  Kuparuk  River  Unit, Endicott,  and                                                               
Granite Point.   It's the operator of the Point  Thomson Unit and                                                               
the largest  interest holder  in the  Prudhoe Bay.   ExxonMobil's                                                               
current working interest oil  production is approximately 180,000                                                               
barrels per day  (B/D), and it's the largest  owner of discovered                                                               
gas  resources.     ExxonMobil's  Alaska   production  represents                                                               
approximately 4 percent of its  worldwide oil and gas production,                                                               
and is primarily  from Prudhoe Bay and  near-by satellite fields.                                                               
He remarked that  Prudhoe Bay and Point  Thomson have significant                                                               
remaining potential, but at higher cost and risk.                                                                               
                                                                                                                                
MR. OWEN  stated that one  of ExxonMobil's objectives in  the gas                                                               
pipeline  fiscal contract  negotiations  has been  to reduce  the                                                               
risk associated with  fiscal change by working with  the State of                                                               
Alaska to establish a predictable  and durable fiscal environment                                                               
in which to  make long term investment decisions.   Any change in                                                               
the fiscal regime  for oil had a direct impact  on how ExxonMobil                                                               
views  the  stability of  the  Alaska  fiscal environment,  which                                                               
impacts  how  it  evaluates ongoing  investment  decisions.    He                                                               
relayed that ExxonMobil understands  the State of Alaska's desire                                                               
to  obtain additional  tax  revenue  at higher  oil  prices.   He                                                               
opined  that  one   of  the  most  challenging   tasks  that  the                                                               
legislature can  undertake is  how to change  the oil  tax system                                                               
without  damaging the  industry.   He remarked  that as  Governor                                                               
Murkowski  has  correctly stated  on  many  occasions, the  North                                                               
Slope is one  of the most expensive places in  which the [oil and                                                               
gas] industry  operates.  He  added that  tax systems need  to be                                                               
carefully  designed to  ensure that  the  desired objectives  are                                                               
achieved without  resulting in  unintended consequences,  such as                                                               
reduced investments and lower reserve  recovery.  One of the many                                                               
questions  that ExxonMobil  is  asked  is, why  is  it and  other                                                               
producers  seeking  durability  and  predictability  for  oil  in                                                               
parallel with negotiating a fiscal contract for a gas pipeline.                                                                 
                                                                                                                                
12:41:43 PM                                                                                                                   
                                                                                                                                
MR. OWEN  answered that the gas  on the North Slope  is contained                                                               
in the  same reservoirs as  the oil  and is produced  through the                                                               
same  facilities.   He explained  that for  a gas  project to  be                                                               
viable, ExxonMobil  needs the  fields that  produce both  oil and                                                               
gas to  be viable, underpinned  by predicable and  durable fiscal                                                               
terms.  A commitment of billions  of dollars to build the natural                                                               
gas pipeline requires confidence that  the base oil business will                                                               
remain healthy for  the long-term.  In regard to  the current oil                                                               
production  severance  tax  system,  the  Economic  Limit  Factor                                                               
(ELF),  he  opined that  it  has  been effective  at  encouraging                                                               
investment  and mitigating  production decline.   He  stated that                                                               
the ELF  was designed to  allow the  State of Alaska  to increase                                                               
the  production tax  while not  stifling  investment in  marginal                                                               
fields.   The  ELF scaled  down the  production tax  rate when  a                                                               
field became more marginal, reducing  the economic limit to which                                                               
a field could  be produced and ultimately  allowing more reserves                                                               
to be recovered.   He further stated that the  1989 ELF amendment                                                               
significantly  increased the  production tax  on Prudhoe  Bay and                                                               
the  Kuparuk   River  Unit,  while  providing   an  incentive  to                                                               
encourage  the   development  of  smaller  fields.     That  1989                                                               
amendment  worked  as  intended,  with many  small  and  marginal                                                               
fields coming on stream over the  past 17 years.  The ELF lowered                                                               
the  tax  rate  on  those  fields,  supporting  their  commercial                                                               
viability.                                                                                                                      
                                                                                                                                
MR. OWEN  relayed that while  ExxonMobil would like to  have more                                                               
Prudhoe Bays  and Kuparuk  River Units,  it and  the rest  of the                                                               
industry  haven't found  any.   Consequently, the  focus for  the                                                               
past  ten years  has been  on  the development  of these  smaller                                                               
satellite  fields.   Satellites  are  generally  not economic  as                                                               
stand alone  developments and have  required both  new technology                                                               
and  connection to  existing  infrastructure  to be  commercially                                                               
viable.  He stated that many  of these fields produce viscous oil                                                               
contained  in lower  quality  reservoirs requiring  significantly                                                               
higher costs, which adds to the  risks for development.  He added                                                               
that this  is especially true  for the Polaris and  Orion viscous                                                               
oil developments,  with oil that  literally flows  like molasses.                                                               
Developing  these  fields  has   required  new  technology,  more                                                               
expensive  drilling and  completion  techniques, new  production-                                                               
handling  equipment,  and  extensive  modifications  to  existing                                                               
facilities  to  process these  viscous  production  streams.   He                                                               
informed the  committee that since 2000,  ExxonMobil has invested                                                               
over $250 million in the  engineering, drilling, and construction                                                               
of  associated   facilities  for   the  development   of  Aurora,                                                               
Borealis,  Midnight  Sun, Polaris,  and  Orion.   He  added  that                                                               
significant additional capital is  required over the next several                                                               
years to fully develop these resources.                                                                                         
                                                                                                                                
12:44:39 PM                                                                                                                   
                                                                                                                                
MR.  OWEN remarked  that today  these fields  are mitigating  the                                                               
decline  of  oil  production on  the  North  Slope,  contributing                                                               
50,000 B/D  gross and  are expected to  recover over  500 million                                                               
barrels  gross.   Under the  ELF formula,  many of  these smaller                                                               
satellite fields paid  little or no production tax.   Even though                                                               
these fields  were paying  little production  tax, they  did, and                                                               
continue  to,   contribute  substantial  amounts  to   Alaska  in                                                               
royalties, property  taxes, income taxes, and  jobs for Alaskans.                                                               
Over the past  five years, ExxonMobil and  other working interest                                                               
owners have  also extended the  primary Prudhoe Bay  enhanced oil                                                               
recovery (EOR) technology to some  of these satellite fields.  He                                                               
informed the  committee that since 1998,  ExxonMobil has invested                                                               
over  $30   million  in  tertiary  recovery   projects  at  Point                                                               
McIntyre, Eileen  West End, and  Borealis, which are  expected to                                                               
produce an additional  60 million barrels gross.   While tertiary                                                               
projects recover  additional oil, the production  profile results                                                               
in  slower  oil  recovery  and  longer  payout  periods.    These                                                               
satellite EOR  projects are in  the early stages  of development.                                                               
The  major investments  have been  made, but  the oil  production                                                               
benefits will  not be  received until  many years  out.   The ELF                                                               
provision  of the  existing production  severance tax  made these                                                               
economically challenged projects commercially viable.                                                                           
                                                                                                                                
MR.  OWEN stated  that  taken together,  the  recent Prudhoe  Bay                                                               
satellite  and  EOR  development   projects  developed  over  560                                                               
million barrels gross.  While  the resulting production tax under                                                               
ELF was  relatively minor,  Alaska's royalty  oil would  total 70                                                               
million barrels, which at today's  oil prices is worth roughly $4                                                               
billion.   He  opined that  the ELF  system has  worked well  for                                                               
industry and the  State of Alaska by  encouraging significant new                                                               
investment.  However, he explained  it's also recognized that ELF                                                               
can be  considered a somewhat  regressive system in that  it does                                                               
not reflect  "profitability" or "cost"  in the division  of gross                                                               
revenue between  the state and  the producers as oil  prices rise                                                               
and fall.   He said that  the assumption that a  well is marginal                                                               
at 300  B/D does  not necessarily  hold in  the current  high oil                                                               
price environment,  yet this assumption typically  contributes to                                                               
a reduced  ELF factor  based on  the current  formula.   He added                                                               
that  as  a global  oil  and  gas producer,  ExxonMobil  operates                                                               
across a wide array of fiscal systems.                                                                                          
                                                                                                                                
12:47:10 PM                                                                                                                   
                                                                                                                                
MR.  OWEN  relayed  that  it's most  important  that  the  system                                                               
recognize  the quality  of the  resources so  that the  potential                                                               
developments  will be  commercially viable  and attract  capital.                                                               
The quality  of resource pertains to  the size and nature  of the                                                               
oil  and gas  reservoirs,  the cost  and  technology required  to                                                               
develop those reservoirs, the distance  to market, as well as the                                                               
tax  and royalty  system that  applies,  including the  long-term                                                               
stability of that  system.  He explained that  countries that are                                                               
experiencing  significant industry  investment have  achieved the                                                               
proper  balance  in  their  fiscal  regimes.    He  informed  the                                                               
committee  that  ExxonMobil's  assessment of  the  remaining  oil                                                               
resource  suggests future  growth opportunities  will come  from:                                                               
complex EOR  projects; development of smaller,  more marginal oil                                                               
accumulations;  and the  innovative  development  of viscous  and                                                               
heavy  oil  resources.   These  opportunities  will  require  the                                                               
development  and  application  of  new  technology,  higher  unit                                                               
development  costs,  and more  complex  operations  to deliver  a                                                               
given  production  rate.    These resources  are  much  lower  in                                                               
quality  as  compared to  Prudhoe  Bay  and Kuparuk  River  Unit,                                                               
though they  face the similar  challenges associated  with arctic                                                               
conditions  and distance  to market.    Therefore, he  reiterated                                                               
that ExxonMobil  is concerned that the  administration's proposal                                                               
is  weighted towards  a higher  tax,  which may  prevent some  of                                                               
Alaska's challenged resources from being developed.                                                                             
                                                                                                                                
MR.  OWEN,  in  regard  to  the  administration's  PPT  proposal,                                                               
explained that this  proposal represents a tax  based on profits,                                                               
which results in a sharing of  the risks and the rewards across a                                                               
range  of prices.   The  State of  Alaska will  receive a  higher                                                               
share of the revenues when prices  are high and will accept lower                                                               
taxes during periods of low prices.   The proposal moves from the                                                               
regressive ELF  system to  a progressive system.   He  added that                                                               
ExxonMobil  affiliates  have  significant experience  in  profit-                                                               
based progressive  systems around the  world and they  work well,                                                               
as long  as they have properly  taken into account the  nature of                                                               
the  esource base.   In  regard to  the key  features of  the PTT                                                               
proposal,  he commented  that  HB 488  represents  a major  step-                                                               
change  in Alaska's  current production  tax system.   He  opined                                                               
that  the  bill  appropriately   addresses  this  step-change  by                                                               
including a  transition plan so that  recent investment decisions                                                               
are  not adversely  impacted.   The  bill  provides a  transition                                                               
allowance over  the next six  years based on  capital investments                                                               
made in the last five years.   He stated that ExxonMobil believes                                                               
that  this transition  plan is  appropriate because  the benefits                                                               
from these recent investments have not yet been fully received.                                                                 
                                                                                                                                
12:50:04 PM                                                                                                                   
                                                                                                                                
CO-CHAIR RAMRAS  inquired as  to the  amount of  money ExxonMobil                                                               
has invested over the past five years.                                                                                          
                                                                                                                                
MR.  OWEN  replied  approximately   $800  million.    In  further                                                               
response  to  Co-Chair  Ramras,   he  said  that  ExxonMobil  has                                                               
generated over  $22 billion  in corporate  profits over  the past                                                               
five years.                                                                                                                     
                                                                                                                                
CO-CHAIR  SAMUELS  inquired  as  to the  profits  ExxonMobil  has                                                               
generated over the past five years in Alaska.                                                                                   
                                                                                                                                
MR. OWEN  explained that ExxonMobil doesn't  separate its profits                                                               
by  state,  but stated  that  ExxonMobil's  production in  Alaska                                                               
represents about 4 percent of its worldwide production.                                                                         
                                                                                                                                
CO-CHAIR RAMRAS  asked how much  [money] ExxonMobil  has invested                                                               
as well as earned in Alaska.                                                                                                    
                                                                                                                                
MR.  OWEN answered  that ExxonMobil  has  invested $800  million.                                                               
Its  worldwide profits  have been  approximately $22  billion per                                                               
year.  He said that  ExxonMobil's worldwide earnings in 2005 were                                                               
$36 billion  and added that  it invested $170 million  in Alaska.                                                               
In  response to  Co-Chair Ramras,  he answered  that BP  produced                                                               
180,000 barrels of oil.                                                                                                         
                                                                                                                                
12:52:23 PM                                                                                                                   
                                                                                                                                
MR. OWEN  restated that ExxonMobil believes  that this transition                                                               
plan  is  appropriate  because the  benefits  from  these  recent                                                               
investments  have not  yet  been  fully received.    Oil and  gas                                                               
companies  invest  large  sums  of money  years  ahead  of  first                                                               
production  and   are  at  risk  for   price,  development  cost,                                                               
production rates, and  ultimate reserve recovery.   He added that                                                               
in most cases,  it takes many years, often more  than five years,                                                               
for a  return on oil or  gas investment.  For  example, satellite                                                               
and tertiary  recovery investment decisions during  the last five                                                               
years were made under the  ELF structure anticipating a lower tax                                                               
relative to  that proposed under  the PTT  bill.  He  opined that                                                               
the  State of  Alaska  appropriately provided  this incentive  so                                                               
that these  challenged and costly projects  would be commercially                                                               
viable.    He remarked  that  it's  not appropriate  to  suddenly                                                               
increase taxes  on these investments without  providing some form                                                               
of consideration.  The transition  provision recognizes that past                                                               
investments  were  made  under the  ELF  structure  and  somewhat                                                               
reduces the increased tax treatment  to which these projects will                                                               
now be subjected.                                                                                                               
                                                                                                                                
12:53:23 PM                                                                                                                   
                                                                                                                                
MR.  OWEN   remarked  that  to  avoid   penalizing  these  recent                                                               
investments, the transition provisions  included in this bill are                                                               
essential.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  GARA   commented  that   a  few   countries  have                                                               
increased their  taxes in recent  years and asked which  of those                                                               
countries  where ExxonMobil  invests  have granted  a credit  for                                                               
investments prior to the tax change.                                                                                            
                                                                                                                                
MR. OWEN answered that he  didn't have that information with him.                                                               
In most  cases, when countries make  a major change in  their tax                                                               
provisions, they  provide some kind of  transition arrangement in                                                               
order that there isn't just this step-change in the tax system.                                                                 
                                                                                                                                
MARTIN   MASSEY,   U.S.   Joint  Interest   Manager,   ExxonMobil                                                               
Corporation,   explained   that    ExxonMobil   has   contractual                                                               
arrangements with  countries such  that the terms  are solidified                                                               
for the  lifetime of the  resources.  Countries might  change tax                                                               
regimes, but  it has no impact  on those arrangements.   He added                                                               
that in many cases there is some sort of a transition.                                                                          
                                                                                                                                
REPRESENTATIVE BERKOWITZ  asked for an  example of a  regime that                                                               
has changed its taxing, and the corresponding lookback.                                                                         
                                                                                                                                
MR.  OWEN  clarified that  the  lookback  investment attempts  to                                                               
consider the impact of the higher  tax rate on the revenue stream                                                               
from previous  investments.  He  added that to some  extent, it's                                                               
recognizing a transition  from the current average tax  rate to a                                                               
substantially higher  one.  Rather than  adversely impacting some                                                               
of those recent  decisions, a transition arrangement  arises.  He                                                               
explained  that  one   of  the  easiest  ways   to  generate  the                                                               
transition arrangement  is by means  of a production  profit tax,                                                               
which is a deduction for  recent spending on investments over the                                                               
previous five years.                                                                                                            
                                                                                                                                
REPRESENTATIVE   BERKOWITZ  commented   that   when  there's   an                                                               
assertion made  that there's a  certain course of  conduct that's                                                               
taking place in other jurisdictions,  it would be helpful if [the                                                               
State of Alaska] could get  some substantiation for that in order                                                               
that it have a more superior method of devising its own policy.                                                                 
                                                                                                                                
MR.  MASSEY responded  that  ExxonMobil  already has  contractual                                                               
arrangements with regimes around the  world, which results in the                                                               
predictability  and stability  of its  investments regardless  of                                                               
changes in price.                                                                                                               
                                                                                                                                
REPRESENTATIVE BERKOWITZ  said it would  be helpful to  know what                                                               
those   regimes  are   and  the   nature  of   those  contractual                                                               
arrangements.  He added that it  would also be helpful to know of                                                               
regimes where  ExxonMobil doesn't have  contractual arrangements,                                                               
what the regimes are, and  the lookback provisions that have been                                                               
made.                                                                                                                           
                                                                                                                                
12:57:21 PM                                                                                                                   
                                                                                                                                
CO-CHAIR RAMRAS asked  what the effective ELF  rate ExxonMobil is                                                               
paying to aggregate the oil production in Alaska is.                                                                            
                                                                                                                                
DAN SECKERS,  Exxon Tax Counsel, ExxonMobil  Corporation, replied                                                               
that  for ExxonMobil's  Alaska operations,  it's approximately  9                                                               
percent.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  SEATON  commented  that  there was  a  recent  10                                                               
percent  tax rate  increase in  the  United Kingdom  (U.K.).   He                                                               
asked, "Did they make any  kind of backward looking adjustment on                                                               
that, or do you have investments in the U.K.?"                                                                                  
                                                                                                                                
MR. OWEN confirmed  that ExxonMobil does have  investments in the                                                               
U.K., but added that he didn't have that data with him.                                                                         
                                                                                                                                
REPRESENTATIVE  SEATON inquired  as to  whether ExxonMobil  has a                                                               
contractual  arrangement  with  the  U.K.  such  that  ExxonMobil                                                               
remained at  the previous  [tax] rate, even  though the  U.K. has                                                               
increased its tax rate.                                                                                                         
                                                                                                                                
MR.  MASSEY explained  that ExxonMobil  doesn't  operate under  a                                                               
contractual  arrangement in  the U.K.    He added  that the  U.K.                                                               
[tax]  system has  been  in  place, and  oil  and gas  investment                                                               
activities have existed there, for  many years.  He said, "You're                                                               
basically operating  under a system  that has been  modified year                                                               
after year."  ExxonMobil pays  the taxes under the current system                                                               
[in the U.K.]                                                                                                                   
                                                                                                                                
1:00:11 PM                                                                                                                    
                                                                                                                                
MR. OWEN discussed  the tax rate and investment tax  credits.  He                                                               
expressed ExxonMobil's  concern that a  20 percent tax  rate will                                                               
not  support  the growth  opportunities  remaining  on the  North                                                               
Slope,  which he  described as  primarily  complex EOR  projects,                                                               
development   of   small   oil  accumulations,   and   innovative                                                               
development of  viscous and heavy  oil resources.  He  noted that                                                               
these  opportunities  have  challenged   economics.    While  the                                                               
investment  tax credit  of 20  percent will  enhance the  present                                                               
value economics of new investments,  the 20 percent tax rate will                                                               
result in lower overall cash flow.   He stated that the impact on                                                               
all  economic  parameters  must be  carefully  weighed  before  a                                                               
decision to  invest is  made.   The combination  of a  20 percent                                                               
credit along  with a 20 percent  tax rate may not  be adequate to                                                               
support development of all of the remaining opportunities.                                                                      
                                                                                                                                
1:01:17 PM                                                                                                                    
                                                                                                                                
MR. OWEN  strongly recommended that the  legislature not increase                                                               
the proposed  tax rate or  reduce the  proposed tax credits.   He                                                               
discussed  another feature  of  the PPT  bill,  which is  royalty                                                               
settlement   methodology.     HB  488   addresses  many   of  the                                                               
longstanding issues  that have  divided the  State of  Alaska and                                                               
the industry  over the years.   For  example, too many  years and                                                               
too much  money have been spent  in disputes over how  to value a                                                               
single  barrel of  crude oil  or a  single molecule  of gas.   He                                                               
opined that it made little sense  in the past and it makes little                                                               
sense today  for the State  of Alaska to have  separate divisions                                                               
determining the  value of oil and  gas - one for  royalty and one                                                               
for taxes.   There  is only one  value in the  market place.   He                                                               
explained  that HB  488 allows  the State  of Alaska  to value  a                                                               
producer's oil  and gas using  the producer's  royalty settlement                                                               
agreement,  which  was  negotiated  with, and  approved  by,  the                                                               
Department of  Revenue (DOR).   This will provide certainty  to a                                                               
producer on the value on which  to pay its royalty and production                                                               
taxes and will reduce the  administrative and audit costs to both                                                               
the State of Alaska and the industry.                                                                                           
                                                                                                                                
1:02:27 PM                                                                                                                    
                                                                                                                                
MR. OWEN noted  that under current prices, the  industry will pay                                                               
more in taxes  as compared to the current  production tax system.                                                               
However,  ExxonMobil needs  predictability  and durability  under                                                               
which to gauge  investment decisions.  He said that  no one wants                                                               
to invest money in a project  to have the rules changed, reducing                                                               
the  attractiveness of  the  investment.   He  remarked that  the                                                               
transition  provision  is  an  important  feature  of  this  bill                                                               
necessary to provide  relief for the abrupt change  caused by the                                                               
new  PPT system.    The State  of Alaska  decided  to weight  the                                                               
proposal  to  a  higher  tax,  which may  make  it  difficult  to                                                               
progress the  remaining future  development opportunities.   It's                                                               
most  important that  the quality  of the  resources be  factored                                                               
into the  design of the  tax system.   He informed  the committee                                                               
that  ExxonMobil wouldn't  support  a higher  tax  rate or  lower                                                               
credits than proposed in the bill.                                                                                              
                                                                                                                                
1:03:22 PM                                                                                                                    
                                                                                                                                
MR. OWEN explained  that HB 488 seeks to balance  revenues to the                                                               
State of  Alaska and the producers  across a range of  oil prices                                                               
and provides  incentives for  new investments,  which is  a clear                                                               
objective of the  State of Alaska.   Most importantly, ExxonMobil                                                               
believes  that  the  new system,  coupled  with  appropriate  gas                                                               
pipeline fiscal  contract terms, will  lead to a  predictable and                                                               
durable tax  system, which  will enable  the Alaska  gas pipeline                                                               
project  to move  forward  to  the next  phase.    He noted  that                                                               
potential  changes  to the  features  of  the  PTT bill  must  be                                                               
carefully  considered to  avoid upsetting  the balance  contained                                                               
within  the bill.   He  concluded that  HB 488  is important  for                                                               
Alaska and  the producers.   It  is one part  - a  very important                                                               
part -  of a series of  related issues that the  legislature will                                                               
need  to  address  to ultimately  provide  the  necessary  fiscal                                                               
environment  to  stimulate oil  production  and  to progress  the                                                               
Alaska gas pipeline project.                                                                                                    
                                                                                                                                
1:04:23 PM                                                                                                                    
                                                                                                                                
MR.  OWEN  explained  that  the fiscal  contract  that  is  being                                                               
finalized  under the  authority of  the Stranded  Gas Development                                                               
Act will incorporate  this PPT legislation by  reference in order                                                               
to  provide fiscal  stability.   ExxonMobil is  currently working                                                               
with  the administration  on how  best to  incorporate this  bill                                                               
into  the fiscal  contract.   He noted  that the  fiscal contract                                                               
will  soon  be  released  for  public  and  legislative  comment.                                                               
Following the  regular session,  ExxonMobil understands  that the                                                               
governor will call a special  session so the legislature can vote                                                               
on the  contract.  He  further noted  that for that  reason, it's                                                               
important that  HB 488 be  enacted in  its present form  prior to                                                               
that special session.  ExxonMobil has  been in Alaska for over 50                                                               
years and  its future business  plans show continued  activity in                                                               
Alaska for  at least 50  years.   He informed the  committee that                                                               
ExxonMobil  is  on   the  verge  of  taking  the   next  step  to                                                               
commercialize Alaska's  North Slope  gas and asked  the committee                                                               
to support the administration's efforts in this regard.                                                                         
                                                                                                                                
                                                                                                                                
1:05:27 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS stated  that the first $73 million  made is tax-                                                               
free and inquired about ExxonMobil's position on that.                                                                          
                                                                                                                                
MR.   OWEN  responded   that  ExxonMobil   understands  why   the                                                               
administration proposed  a $73 million  allowance - it  is trying                                                               
to reduce the barriers for new  entrants and explorers in the oil                                                               
and  gas  [industry]  in  Alaska.   To  some  extent,  ExxonMobil                                                               
believes  that HB  488 has  the  potential to  create an  unlevel                                                               
playing   field.     However,  he   reiterated  that   ExxonMobil                                                               
understands  -  and agrees  with  -  what the  administration  is                                                               
trying to do.                                                                                                                   
                                                                                                                                
1:06:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ  commented  that  a  threat  -  if  the                                                               
legislature adjusts  the oil  tax, the  producers will  walk away                                                               
from the gas pipeline - is  implicit in Mr. Owen's testimony.  He                                                               
asked, "Is that an accurate assessment?"                                                                                        
                                                                                                                                
MR.  MASSEY  said  he  wouldn't  characterize  it  as  a  threat.                                                               
ExxonMobil believes  that the administration has  proposed a bill                                                               
that provides  the predictability  and durability that  it needs.                                                               
The  focus  of   the  negotiations  has  been  to   arrive  at  a                                                               
predictable, durable  regime, under  which companies are  able to                                                               
make their investments.   He added that  ExxonMobil believes that                                                               
the tax rates  may be too high and that  there may be development                                                               
opportunities  on  the  North  Slope that  will  not  go  forward                                                               
because of the tax rate the governor/administration selected.                                                                   
                                                                                                                                
REPRESENTATIVE BERKOWITZ  remarked that  the only people  who are                                                               
unaware  of what's  in this  proposed  gas pipeline  bill is  the                                                               
legislature.   It  is  being asked  to craft  a  gas tax  without                                                               
having seen  a pipeline deal, which  he opined, is going  to be a                                                               
difficult  thing  to  do.     He  relayed  that  he'd  feel  more                                                               
comfortable if the gas pipeline  bill were produced in order that                                                               
the legislature conduct  an analysis how it fits into  an oil and                                                               
gas tax.                                                                                                                        
                                                                                                                                
1:08:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS clarified that  the legislature is discussing HB
488  and  instructed the  committee  to  refrain from  discussing                                                               
extraneous oil and gas issues.                                                                                                  
                                                                                                                                
1:09:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA commented  that  for the  tax  system to  be                                                               
fair,  the  legislature  needs to  research  what  the  resulting                                                               
profit margins would  be for the various companies.   The current                                                               
profit margins are  "massive."  He relayed  that consultants have                                                               
advised  that producers  need to  be able  to project,  with some                                                               
comfort, in  the range  of 15  percent or  more profit  margin on                                                               
development.   He  inquired as  to the  profit margin  ExxonMobil                                                               
needs to project in order for a project to be a "go."                                                                           
                                                                                                                                
MR. OWEN informed the committee  that ExxonMobil doesn't consider                                                               
single  parameters   in  its   economic  analyses.     ExxonMobil                                                               
considers a range  of parameters:  internal right  of return, net                                                               
present  value, actual  value, the  amount of  money the  project                                                               
would generate,  the quality of  the resource, and  the technical                                                               
and  geological  risks  that exists.    [The  economic  analysis]                                                               
depends  on   all  of  those  parameters   and/or  risks  weighed                                                               
together,  which results  in how  ExxonMobil  feels about  moving                                                               
forward   with   an  investment.      In   further  response   to                                                               
Representative  Gara,  in  regard to  ExxonMobil's  earnings,  he                                                               
explained that when one looks at  them as cents earned on dollars                                                               
of sales, they vary  from 1 cent per dollar of  sales up to about                                                               
20 cents  per dollar  of sales.   1 cent per  dollar of  sales is                                                               
like the automotive industry, while  20 cents per dollar of sales                                                               
is  like the  pharmaceutical  industry.   The  oil industry,  and                                                               
Exxon Mobil, are around 8-10 cents  per dollar of sales, which is                                                               
right in  the middle of  the pack.   He clarified that  there's a                                                               
lot of money being invested and there  are a lot of sales, so the                                                               
total  earnings  are  very  large numbers.    However,  when  the                                                               
numbers  are  normalized  on  the cents  per  dollars  of  sales,                                                               
they're actually in line with most of the [industries].                                                                         
                                                                                                                                
1:13:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA  remarked  that under  the  current  system,                                                               
ExxonMobil can anticipate essentially  a 0 percent production tax                                                               
for  most fields  it  develops.   He  surmised that  ExxonMobil's                                                               
profits have probably  increased by "hundreds of  percent" as oil                                                               
prices increased from  $20 [per barrel] to $60 [per  barrel].  He                                                               
observed that  the aforementioned  doesn't seem to  have affected                                                               
ExxonMobil's  current  investment  decisions  because  they  seem                                                               
somewhat similar  this year  to what they  were three  years ago.                                                               
He said:                                                                                                                        
                                                                                                                                
     In  the  face  of  that, why  should  we  believe  that                                                                    
     adopting a  new tax  structure that  slightly increases                                                                    
     the tax and  gives you a 20 percent credit  is going to                                                                    
     cause  you to  change  your  investment behavior,  more                                                                    
     than a system that charged  you essentially a 0 percent                                                                    
     tax on new  fields and in which you've  seen profits go                                                                    
     up  multiple  fold,  but investments  haven't  gone  up                                                                    
     multiple fold.                                                                                                             
                                                                                                                                
1:14:09 PM                                                                                                                    
                                                                                                                                
MR. OWEN surmised that Representative  Gara's question is whether                                                               
this  [bill]  would  change   ExxonMobil's  investment  into  the                                                               
future.   He  responded  that ExxonMobil  believes  that this  20                                                               
percent tax  rate is a  significant increase  and may lead  to it                                                               
not  developing all  of the  resources  that exist  on the  North                                                               
Slope.   He  added that  when  ExxonMobil considers  some of  its                                                               
near-term  investments, this  PPT  proposal results  in a  credit                                                               
which  helps  the present  value  of  investments, but  [the  PPT                                                               
proposal] significantly increases the tax  which is paid over the                                                               
long-term.     When   one  considers   the   analysis  that   the                                                               
administration's consultant conducted, it  was all around certain                                                               
size opportunities  and quality  opportunities.  He  relayed that                                                               
there  are some  marginal  investments in  which  it's not  clear                                                               
whether this  proposal will allow all  of them to go  forward due                                                               
to  the tax  rate.   In  near-term, ExxonMobil  is continuing  to                                                               
advance.   Prices  are  currently quite  high  and ExxonMobil  is                                                               
currently investing  similar to  previous years, although  it has                                                               
increased  its activity  in  drilling.   In  the long-term,  when                                                               
ExxonMobil faces the challenged  areas - heavy oil opportunities,                                                               
EOR,  and very  small  pools  - they  are  going  to be  marginal                                                               
investments.   He reiterated that  ExxonMobil is  concerned about                                                               
this [proposed] tax rate.                                                                                                       
                                                                                                                                
1:16:22 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  RAMRAS  inquired  as  to how  much  [money]  ExxonMobil                                                               
donated back to the communities in Alaska in 2005.                                                                              
                                                                                                                                
MR.  OWEN  answered  approximately   $500,000.    He  added  that                                                               
ExxonMobil  currently has  about  20 employees  in Alaska,  which                                                               
isn't a large employee base.                                                                                                    
                                                                                                                                
CO-CHAIR RAMRAS requested  that Mr. Owen inform  the committee as                                                               
to what  the ELF tax payment  was in 2005, or  projected in 2006,                                                               
versus what it would be under the PPT regime.                                                                                   
                                                                                                                                
1:18:30 PM                                                                                                                    
                                                                                                                                
MR.  SECKERS replied  that in  2005, ExxonMobil's  production tax                                                               
was  approximately $300  million.   He  added  that research  has                                                               
indicated  that under  PPT, ExxonMobil's  tax  would increase  by                                                               
approximately  $100  million.    Under  PPT,  the  tax  would  be                                                               
calculated  by  subtracting  ExxonMobil's  cost  associated  with                                                               
producing the particular revenue from its total revenue.                                                                        
                                                                                                                                
1:20:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  CROFT commented  that it  makes a  great deal  of                                                               
difference  whether  the legislature  is  talking  about a  stand                                                               
alone PPT law of general application  wrapped into a 10-, 15-, or                                                               
20-year contact,  or as a  precondition to the  gasline contract.                                                               
He asked, "Does ExxonMobil see passage  of HB 488 in it's current                                                               
form or  something very  near it,  as a  precondition to  the gas                                                               
agreement that you've apparently concluded?"                                                                                    
                                                                                                                                
1:21:49 PM                                                                                                                    
                                                                                                                                
MR.  MASSEY responded  that "precondition"  and "threat"  are not                                                               
words that  he would use.   He added that  once the terms  of the                                                               
contract are  written, consistent  with the  bill, it  will allow                                                               
ExxonMobil to move to the next phase of the gas pipeline.                                                                       
                                                                                                                                
REPRESENTATIVE  CROFT asked,  "Do you  have a  legal right  under                                                               
whatever you've  signed on the  gasline agreement to pull  out if                                                               
we make significant changes?"                                                                                                   
                                                                                                                                
MR.  MASSEY responded  that the  administration  has arranged  to                                                               
first address the bill.  Once  the bill is addressed, how the oil                                                               
bill is written into the  contract and the actual contract itself                                                               
will be  made available for  public comment,  legislative review,                                                               
and a  decision to ratify it  in order that the  governor is able                                                               
to sign it.                                                                                                                     
                                                                                                                                
REPRESENTATIVE  CROFT  remarked that  it  either  is or  isn't  a                                                               
component of the gas pipeline  agreement, which [the legislature]                                                               
hasn't seen.                                                                                                                    
                                                                                                                                
MR. MASSEY stated  that it is ExxonMobil's position  that the oil                                                               
fiscal stability will be addressed in the gas pipeline contract.                                                                
                                                                                                                                
1:25:37 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  clarified that HB  488 does nothing  for fiscal                                                               
certainty, which will be a separate discussion.                                                                                 
                                                                                                                                
REPRESENTATIVE LEDOUX  observed that  ExxonMobil keeps  using the                                                               
terms "predictability"  and "durability."  She  asked, "Actually,                                                               
wouldn't any bill,  as long as it was encompassed  in a contract,                                                               
provide you with predictability?"                                                                                               
                                                                                                                                
MR. OWEN answered  that one of the fundamentals is  the health of                                                               
the oil  industry.  The reason  that ExxonMobil wants to  see the                                                               
predictability and  durability long-term  is that  the underlying                                                               
healthy oil  business is needed for  the gas business.   He noted                                                               
that oil and gas are inextricably linked.                                                                                       
                                                                                                                                
REPRESENTATIVE  LEDOUX  clarified  that   as  long  as  that  was                                                               
encompassed  in  some sort  of  contractual  provision, it  would                                                               
provide predictability and durability.                                                                                          
                                                                                                                                
1:27:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON noted  that ExxonMobil  said that  its ELF                                                               
was approximately  .9 in Alaska.   He inquired as to  whether the                                                               
ELF stimulated Alaska investment or  whether PPT, with the credit                                                               
and   full   allowance,   will  better   stimulate   ExxonMobil's                                                               
investment in Alaska.                                                                                                           
                                                                                                                                
MR.   OWEN  confirmed   that  the   ELF  encouraged   investment.                                                               
ExxonMobil  invested and  developed a  large number  of satellite                                                               
fields and  progressed EOR  projects.   He said  that the  way in                                                               
which PPT is structured provides  some incentive.  There are some                                                               
projects that would  do better under ELF, and  some projects that                                                               
would  do  better under  PPT.    Under  PPT,  there may  be  some                                                               
projects that aren't commercially viable.                                                                                       
                                                                                                                                
1:29:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  clarified  that  HB 488  applies  to  gas                                                               
production  across  the  state,  not just  the  North  Slope  gas                                                               
pipeline.                                                                                                                       
                                                                                                                                
1:30:48 PM                                                                                                                    
                                                                                                                                
MR. MASSEY  relayed that ExxonMobil's  focus on the gas  side has                                                               
been  to  define  the  terms  through  the  gas  pipeline  fiscal                                                               
contract.   ExxonMobil recognizes and understands  that gas needs                                                               
to be dealt  with in the PPT  deal because there may  be some gas                                                               
that isn't part of a fiscal  contract.  With its North Slope gas,                                                               
ExxonMobil  intends  to  work with  the  administration  and  the                                                               
legislature on  how to deal with  it and the royalties  and taxes                                                               
associated with the gas through the fiscal contract.                                                                            
                                                                                                                                
1:31:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked, "At this  point in time, do you even                                                               
care  whether gas  is changed  from the  gas ELF  system and  gas                                                               
credit system to the PPT system?   Is this PPT system that is set                                                               
for oil totally applicable to gas production?"                                                                                  
                                                                                                                                
MR. MASSEY,  in regard to  gas on  the North Slope,  relayed that                                                               
it's ExxonMobil's position  to deal with that  through the fiscal                                                               
contract.                                                                                                                       
                                                                                                                                
1:32:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON clarified that  ExxonMobil is not concerned                                                               
about  gas in  this  PPT bill  because  its gas  is  going to  be                                                               
associated with the contract on the North Slope.                                                                                
                                                                                                                                
REPRESENTATIVE  ROKEBERG   inquired  as  to   whether  ExxonMobil                                                               
expects  any  changes  in  its  investments  due  the  change  in                                                               
leadership in the company.                                                                                                      
                                                                                                                                
MR.  OWEN replied  no.   He noted  that ExxonMobil  is continuing                                                               
with  the way  it currently  does business  and opined  that it's                                                               
been a  very seamless  transition.   ExxonMobil will  continue to                                                               
evaluate opportunities with its partners on the North Slope.                                                                    
                                                                                                                                
1:33:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG  inquired as to whether,  under the terms                                                               
of PPT, ExxonMobil would be  receptive to an increased tax credit                                                               
for viscous oil in the frontier exploration.                                                                                    
                                                                                                                                
MR. OWEN  replied that  there are  opportunities that  exist that                                                               
ExxonMobil  is  concerned  about,  which would  be  difficult  to                                                               
progress under  the current  20 percent tax  rate and  20 percent                                                               
credit rate.   Therefore,  there may  be some  opportunities that                                                               
would  be  enabled  if  there   were  higher  credits  for  those                                                               
activities and  likewise for  exploration.   He noted  that there                                                               
are   already  incentives   for  exploration   and  credits   for                                                               
explorations  that exist.   In  regard to  heavy oil,  ExxonMobil                                                               
thinks it's  one of the opportunities  in which it's going  to be                                                               
difficult to progress,  as well as more challenging  than some of                                                               
the others.   He said,  "If you're  asking me will  extra credits                                                               
help projects move forward, I think the answer is yes."                                                                         
                                                                                                                                
REPRESENTATIVE ROKEBERG  continued that  if the  legislature were                                                               
to  increase  the  tax  credit   for  something  specific,  would                                                               
ExxonMobil be  receptive to a change  in the tax rate  that would                                                               
be more aggressive in the account of high oil prices.                                                                           
                                                                                                                                
1:35:23 PM                                                                                                                    
                                                                                                                                
MR. OWEN explained  that at this stage, ExxonMobil  has looked at                                                               
this proposed  bill and  it has some  reservations about  the tax                                                               
rate  and   whether  it  will   allow  all  of   the  development                                                               
opportunities.   ExxonMobil  believes  that  this bill  currently                                                               
balances the  needs of the  State of  Alaska's with the  needs of                                                               
the producers.   Therefore, he stated that ExxonMobil  is able to                                                               
move forward with  this bill.  He noted that  any changes to this                                                               
bill will have to be looked  at very carefully to see what impact                                                               
they will  have on the  overall ability to progress  the resource                                                               
base.   He clarified that  Representative Rokeberg  discussed two                                                               
different  concepts  -   differentiating  credits  and  increased                                                               
progressivity on the price - which  would have to be looked at to                                                               
determine  how they  balance out  in terms  of whether  a healthy                                                               
industry is maintained.                                                                                                         
                                                                                                                                
REPRESENTATIVE  ROKEBERG  asked how  this  tax  would effect  the                                                               
Point Thomson development.                                                                                                      
                                                                                                                                
MR.  OWEN answered  that  the most  likely  development of  Point                                                               
Thomson option is through the gas pipeline.                                                                                     
                                                                                                                                
1:38:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   BERKOWITZ  stated   that  DNR   just  filed   an                                                               
application for  a right-of-way through  Point Thomson  and asked                                                               
whether ExxonMobil had any comment on that.                                                                                     
                                                                                                                                
MR.  OWEN relayed  that ExxonMobil  has been  waiting for  DNR to                                                               
issue it  for public comment,  and now  that it has  been issued,                                                               
ExxonMobil will review it and then comment on it.                                                                               
                                                                                                                                
1:38:43 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS,  in regard  to  the  royalties, asked  whether                                                               
ExxonMobil  thinks  that  private  royalties  should  be  treated                                                               
differently  than  State of  Alaska  royalties  by the  industry.                                                               
Currently in  HB 488, the  private royalties and  state royalties                                                               
are  treated  differently in  terms  of  cost recovery  from  the                                                               
industry.   He asked, "How do  you balance out the  fact that the                                                               
royalties from  the State of Alaska  get treated one way  and the                                                               
private royalties get treated another way?"                                                                                     
                                                                                                                                
MR.  OWEN responded  that it's  not an  area that  ExxonMobil has                                                               
really delved into.                                                                                                             
                                                                                                                                
1:39:54 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARA  relayed that  the money from  the production                                                               
tax eventually  is deducted  from the  State of  Alaska corporate                                                               
income tax.   He clarified that when the committee  asks how much                                                               
more money will  it raise, the committee means in  total, not how                                                               
much more money will it raise  in the severance tax prior to that                                                               
being deducted  from the  State of  Alaska corporate  income tax.                                                               
He  further clarified  that  the committee  is  referring to  the                                                               
total net to the State of Alaska, not the pre-deduction net.                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON further  clarified that  the tax  would be                                                               
due monthly and  that there's a provision that if  a company pays                                                               
90 percent  of the tax, it  won't owe interest on  it until March                                                               
of  the following  year.   Federally,  if  one underpays  his/her                                                               
taxes, he/she owes interest, but  there isn't a penalty if he/she                                                               
is at that 90 percent.  He  asked, "Do you have any problems with                                                               
proceeding in that same like manner with the state?"                                                                            
                                                                                                                                
1:42:04 PM                                                                                                                    
                                                                                                                                
MR.  MASSEY  stated  that  under  the  current  bill,  there's  a                                                               
provision that  allows ExxonMobil  to pay its  taxes based  on 90                                                               
percent.  If  ExxonMobil is within that 90 percent,  it would not                                                               
have any interest or penalties due,  which is very similar to the                                                               
federal law.   The federal  law has  a number of  different tests                                                               
one can use - 100 percent of  the prior year's tax and 90 percent                                                               
of the current year's tax.                                                                                                      
                                                                                                                                
1:42:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON,  in regard  to the federal  tax, clarified                                                               
that  if  a company  is  within  90  percent,  it doesn't  owe  a                                                               
penalty, but  it still owes interest  on the tax due.   He asked,                                                               
"If this  is due  monthly, why  should the  state say  you're not                                                               
going to  owe interest on  the underpayment?"  He  furhter asked,                                                               
"Is there  any reason that  you can see  why the State  of Alaska                                                               
shouldn't work under that same system?"                                                                                         
                                                                                                                                
MR.  MASSEY answered  that it's  more of  a policy  call for  the                                                               
State of Alaska.                                                                                                                
                                                                                                                                
1:44:50 PM                                                                                                                    
                                                                                                                                
MR.  SECKERS,  explained  that in  2005,  using  current  prices,                                                               
ExxonMobil's production tax gross  revenue from Alaska would have                                                               
been approximately  $3.1 billion.   From  that, the  royalty that                                                               
ExxonMobil would have paid would  be subtracted.  Under ELF, $500                                                               
million in  royalties would  have been  subtracted from  the $3.1                                                               
billion total revenue.  He added  that the gross revenue for 2005                                                               
would have been  about $2.8 million.  He said  that the effective                                                               
tax rate  for ExxonMobil's gross  operations in Alaska  under the                                                               
aggregated   ELF   would   have   been   around   11.2   percent.                                                               
ExxonMobil's  tax  in 2005  would  have  been approximately  $350                                                               
million.   Under  PPT, ExxonMobil  would start  with the  taxable                                                               
revenues  and subtract  the $73  million allowance,  subtract its                                                               
total   lease  operations   expenses,  which   would  have   been                                                               
approximately  $400 million.   Next,  ExxonMobil would  apply the                                                               
flat tax rate  of 20 percent, resulting in a  $537 million dollar                                                               
tax.   The credit  is only 20  percent of  ExxonMobil's qualified                                                               
capital  expenditures,  which   is  approximately  $190  million.                                                               
ExxonMobil's credit  would have  been approximately  $40 million,                                                               
leaving it an extra tax  bill of approximately $500 million, with                                                               
an effective tax rate close to 16 percent.                                                                                      
                                                                                                                                
REPRESENTATIVE  GARA remarked  that's  the additional  production                                                               
tax  ExxonMobil  will  pay,  but  then  it's  deducted  from  its                                                               
corporate income tax.   He clarified that the  committee wants to                                                               
know how much extra the State of Alaska will receive.                                                                           
                                                                                                                                
MR. SECKERS responded that if  ExxonMobil then subtracted it from                                                               
its corporate income tax, it  would probably remove approximately                                                               
another.    The  maximum  tax  rate in  Alaska  is  9.4  percent.                                                               
Assuming  that   ExxonMobil  was   at  that  rate,   the  maximum                                                               
additional  reduction  it  would  get would  be  approximately  9                                                               
percent  of  that  total amount,  which  would  be  approximately                                                               
another $50 million.                                                                                                            
                                                                                                                                
CO-CHAIR  SAMUELS added  that ExxonMobil  would  save [money]  in                                                               
federal taxes also.                                                                                                             
                                                                                                                                
MR.  SECKERS  informed  the  committee  that  under  the  current                                                               
aggregated  ELF  system,  the   corporate  income  tax  would  be                                                               
approximately $100 - $120 million for the State of Alaska.                                                                      
                                                                                                                                
1:50:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO clarified  that  what ExxonMobil's  figures                                                               
show is that under PPT, it's going to pay more taxes.                                                                           
                                                                                                                                
MR. SECKERS noted that it's  never advantageous to pay more taxes                                                               
just to get the deduction.                                                                                                      
                                                                                                                                
REPRESENTATIVE GATTO asked, "What is  your penalty, not just from                                                               
the State of Alaska, but overall?"                                                                                              
                                                                                                                                
1:53:33 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  RAMRAS remarked  that he  advocates this  transition to                                                               
PPT, and said  the committee is discussing  total government take                                                               
and  the  state  taking  more  at  the  expense  of  the  federal                                                               
government.    He  opined  that it's  beneficial  to  Alaska  and                                                               
perhaps detrimental to  the portion of Alaska  revenues which are                                                               
paid to  the federal  tax return.   He requested  that ExxonMobil                                                               
discuss the shift in tax payments  to the State of Alaska as well                                                               
as the deductibility on the federal return.                                                                                     
                                                                                                                                
1:55:49 PM                                                                                                                    
                                                                                                                                
MR.  SECKERS explained  that from  the gross  revenue, the  first                                                               
government take  that ExxonMobil pays  would be a royalty  to the                                                               
State of  Alaska.   Of that total  revenue, ExxonMobil  would pay                                                               
property tax,  which is  about 2  percent, corporate  income tax,                                                               
and production tax.  Production tax  is a deductible item for the                                                               
calculation of state income tax.   He mentioned that Alaska looks                                                               
at ExxonMobil worldwide income and  takes a portion of that based                                                               
on  a  number  of  factors.     When  ExxonMobil  calculates  its                                                               
worldwide  taxable  income  on   its  federal  return,  it  takes                                                               
deductions for the  amount of severance tax it paid  to Alaska as                                                               
well  as other  taxes it  paid.   Then ExxonMobil  calculates the                                                               
federal taxable  income based  on that.   It  is reduced  by what                                                               
ExxonMobil paid to  the State of Alaska, but it's  not dollar for                                                               
dollar, because it's a deduction off of the tax.                                                                                
                                                                                                                                
1:57:50 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS  relayed  that  the committee  has  gotten  the                                                               
impression that at $60 per barrel,  the biggest loser in this tax                                                               
plan  was ConocoPhillips  and the  second biggest  loser was  the                                                               
federal government.  He asked whether that was correct.                                                                         
                                                                                                                                
REPRESENTATIVE CRAWFORD  observed that  the oil and  gas industry                                                               
is cyclical.   The higher the highs are, the  lower the lows are.                                                               
He noted  that current prices  are really  high and said  that he                                                               
would like to  know what PPT, as proposed, would  collect at $12,                                                               
$24, $36,  and $48 per barrel  as well as at  the current prices.                                                               
He said,  "I don't  trust that  oil prices are  going to  stay as                                                               
high as  they are  today.   I think that  they're headed  down at                                                               
some point and I think they're going to head down like a rock."                                                                 
                                                                                                                                
2:00:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON referred  to the effective tax  rate of PPT                                                               
versus the current  ELF.  At $20 per barrel,  effectively it's at                                                               
half the  current tax rate,  which would  be 7 percent  under ELF                                                               
and 3.5  percent under PPT.   He asked, "How significant  is that                                                               
downside  protection at  low oil  prices in  the PPT  formula for                                                               
Exxon[Mobil]?"                                                                                                                  
                                                                                                                                
MR. OWEN remarked  that PPT is a tax on  profit or profitability,                                                               
so it's hard to design a  profit-based tax system that doesn't do                                                               
that.   He  described it  as  progressive by  nature; as  profits                                                               
become lower, the  take becomes lower too.  It's  all part of the                                                               
shift from  one system to  another system, and there's  a natural                                                               
progressivity with  a PPT  system in that  it provides  lower tax                                                               
take for the State of Alaska  at lower prices and higher tax take                                                               
at higher  prices.   He opined that  it's important  because it's                                                               
part of the step to a new structure.                                                                                            
                                                                                                                                
REPRESENTATIVE SEATON reiterated his  interest in determining how                                                               
significant the downside protection when  prices are low or lower                                                               
is  in agreeing  to a  PPT-style system.   He  asked, "Does  that                                                               
really matter much to you at all?"                                                                                              
                                                                                                                                
2:02:54 PM                                                                                                                    
                                                                                                                                
MR. OWEN  confirmed its significance.   He added  that ExxonMobil                                                               
has  considered this  [PPT] system  and ExxonMobil  believes that                                                               
it  ultimately  provides  balance   across  a  range  of  prices,                                                               
including both  low and high  prices.  He  expressed ExxonMobil's                                                               
understanding  of  the desire  to  shift  from a  regressive  ELF                                                               
system to a more progressive PPT system.                                                                                        
                                                                                                                                
2:03:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ  inquired as to  ExxonMobil's long-range                                                               
forecast for the price of oil and the associated probability.                                                                   
                                                                                                                                
MR. OWEN declined to answer.                                                                                                    
                                                                                                                                
REPRESENTATIVE   BERKOWITZ  explained   that  the   committee  is                                                               
attempting  to  put  together  a  tax  rate/tax  proposal  that's                                                               
supposed to be sustainable over a wide range of time and prices.                                                                
                                                                                                                                
MR. MASSEY responded  that ExxonMobil doesn't have an  idea as to                                                               
the future  price [of oil].   He opined  that the key  is whether                                                               
the legislature  has designed a  system, given its  assessment of                                                               
the resources  that remain  to be developed  on the  North Slope,                                                               
that will  attract investment to  those opportunities  and enable                                                               
them to move  forward.  He explained that  ExxonMobil doesn't use                                                               
one  price, rather  it looks  at  investments across  a range  of                                                               
prices in order that it  can understand how viable an opportunity                                                               
is going to be.                                                                                                                 
                                                                                                                                
The committee took an at-ease from 2:07:05 PM to 2:20:55 PM.                                                                
                                                                                                                                
KEN  KONRAD,  Vice President  of  Gas,  BP Alaska,  informed  the                                                               
committee  that  last   week,  after  more  than   two  years  of                                                               
negotiations and  a lot of  hard work on  all side, BP  reached a                                                               
very  finely  balanced agreement  with  the  administration on  a                                                               
predictable  and  durable  fiscal  contract  with  the  State  of                                                               
Alaska.     The  fiscal  contract  will   establish  clear  rules                                                               
governing payments-in-lieu  of taxes BP  would make to  the State                                                               
of  Alaska, including  a PPT  payment  incorporated by  reference                                                               
from this legislation.   He noted that once  ratified, the fiscal                                                               
contract will  enable a  gas pipeline  to advance  in partnership                                                               
with  the State  of Alaska  as an  equity participant.   Much  of                                                               
what's contained in  the PPT legislation was born in  part out of                                                               
the  fiscal  contract  negotiations  BP  has  been  in  with  the                                                               
administration.                                                                                                                 
                                                                                                                                
MR.  KONRAD said  oil and  gas co-exist  in the  same underground                                                               
reservoirs.  They  are produced together through  the same wells,                                                               
flow  together  through the  same  flowlines,  and are  processed                                                               
together in the same facilities.   Some fields have more oil than                                                               
gas and  some fields have  more gas than  oil or condensate.   He                                                               
noted that  it is exceedingly  rare that one is  produced without                                                               
the  other.   Because oil  and  gas co-exist  physically and  are                                                               
produced together through  the same investments made  in well and                                                               
facilities, they are also linked economically.                                                                                  
                                                                                                                                
2:24:08 PM                                                                                                                    
                                                                                                                                
MR.  KONRAD   continued  that  this  inextricable   physical  and                                                               
economic  linkage   is  widely  recognized  by   governments  and                                                               
investors  around the  world.   North American  royalty contracts                                                               
cover  both oil  and  gas.   Internationally,  production-sharing                                                               
contracts include  terms for both oil  and gas.  He  relayed that                                                               
general oil and gas tax  laws across the U.S. and internationally                                                               
always address  both oil and gas.   Governments want to  know how                                                               
much  money  they  will  receive from  oil  and  gas  production.                                                               
Similarly,  investors  need  to  know  how  much  they  will  pay                                                               
governments  when oil  and gas  is  produced and  sold, and  make                                                               
their investments accordingly.   The economic linkage  of oil and                                                               
gas  is  particularly acute  in  Alaska  when considering  a  gas                                                               
pipeline,  given the  unique operating  challenges  on the  North                                                               
Slope and  the criticality  of economies of  scale.   He informed                                                               
the  committee  that  the  producers  and  the  State  of  Alaska                                                               
currently  have  a  problem.     Alaska  North  Slope  (ANS)  oil                                                               
production has been  declining for over 15 years and  has been on                                                               
an unsustainable  trajectory.   He noted  that investment  by the                                                               
industry has been insufficient to limit decline.                                                                                
                                                                                                                                
2:25:37 PM                                                                                                                    
                                                                                                                                
MR.  KONRAD  conjectured  that unless  the  entire  industry,  in                                                               
partnership  with  the  State  of Alaska,  is  able  to  maintain                                                               
economic levels of  oil production to support  and maintain vital                                                               
North  Slope  infrastructure for  many  decades  to come,  a  gas                                                               
project can't  be successful -  it simply can't be  burdened with                                                               
the  cost   of  uneconomic  oil   production.     Investors  need                                                               
confidence   that  the   fiscal  regime   will  be   sufficiently                                                               
competitive  to  attract  the   enormous  amounts  of  additional                                                               
capital needed to maintain economic  levels of ANS oil production                                                               
for decades.   He  said that  providing this  confidence benefits                                                               
both the State  of Alaska and investors against  its common enemy                                                               
- production decline.   Building a gas pipeline  is effectively a                                                               
commitment by the  major producers to maintain  vital North Slope                                                               
infrastructure  for another  40-50 years,  which he  opined is  a                                                               
daunting challenge.   He relayed that  there is a question  as to                                                               
whether there  will be  enough investment  to stem  the long-term                                                               
decline in ANS production, sufficient  oil production to keep the                                                               
unit costs  of operating the Trans-Alaska  Pipeline System (TAPS)                                                               
at an  economically viable level,  and sufficient  oil production                                                               
to  cover  the  operating  and maintenance  investment  costs  of                                                               
operating aging production  facilities.  He said  that answer can                                                               
be  yes because  BP  knows the  oil  is up  there.   Billions  of                                                               
barrels of oil  that might otherwise be left  behind in producing                                                               
fields  can be  accessed.   Viscous  oil in  and around  existing                                                               
infrastructure  that was  discovered decades  ago holds  promise.                                                               
Exploration  near  existing  fields  and  beyond  in  areas  like                                                               
National Petroleum Reserve-Alaska (NPR-A) may have potential.                                                                   
                                                                                                                                
2:27:19 PM                                                                                                                    
                                                                                                                                
MR.  KONRAD   remarked  that  the  aforementioned   is  all  very                                                               
difficult.   ANS production is declining  for a reason -  not for                                                               
lack of  oil, but for  a lack of  profitable ways to  extract it.                                                               
The totality of  industry costs and taxes are high.   However, BP                                                               
believes  that with  the right  technology and  the right  fiscal                                                               
regime, these  historically unprofitable investments can  be made                                                               
viable  so  industry can  convert  resources  into production  to                                                               
sustain  ANS infrastructure.   He  relayed that  this is  why oil                                                               
taxation policy  should appropriately  balance risks  and rewards                                                               
to  enable  this  additional  investment.   Even  prior  to  this                                                               
proposed  tax  increase,  investment  has  been  insufficient  to                                                               
prevent  ongoing   production  decline.    He   opined  that  the                                                               
legislature needs  to very  carefully consider  the impacts  of a                                                               
very  large  tax  increase on  future  investment  and  long-term                                                               
production.    He  further  opined  that  this  is  an  important                                                               
decision and  it shouldn't and  can't be a  shortsighted decision                                                               
based on next year's budget or political calculus.                                                                              
                                                                                                                                
2:28:33 PM                                                                                                                    
                                                                                                                                
MR. KONGRAD  posed the questions  whether North  Slope investment                                                               
will increase  or decrease  as a  result of  significantly higher                                                               
taxes and  whether the long-term  decline in oil  production will                                                               
increase  or decrease  as  a  result.   He  also  asked what  the                                                               
"knock-on" revenue effects on royalty,  State of Alaska corporate                                                               
income  tax,  and  ad  valorem   taxes  (AVT)  if  investment  is                                                               
impacted;  and  whether a  high  tax  rate  at modest  prices  is                                                               
appropriate.   He discussed the  evolution of PPT and  the fiscal                                                               
contract negotiations.   Since the  onset of the  fiscal contract                                                               
negotiations and  years before, BP  has sought to make  clear the                                                               
importance of  having a competitive  and durable  fiscal platform                                                               
for both  oil and gas to  underpin a massive gas  investment.  He                                                               
stated that  including both in  the fiscal contract  is important                                                               
for two  fundamental reasons  among others.   First,  it provides                                                               
confidence  that the  level of  taxation will  be competitive  to                                                               
enable the additional investments  needed to mitigate the ongoing                                                               
decline in  ANS oil  production, so  vital infrastructure  can be                                                               
maintained for another 40-50 years.   Second, it protects BP from                                                               
after  the  fact  tax  increases  on its  business  after  a  gas                                                               
pipeline  has been  built and  it has  no choice  but to  pay and                                                               
produce  regardless.   He noted  that  is what  happened as  TAPS                                                               
entered service  some 30 years  ago.   He reiterated that  both a                                                               
competitive  and  durable tax  regime  are  essential and  should                                                               
align well with the goals of the State of Alaska.                                                                               
                                                                                                                                
MR. KONRAD  said that in  the summer of 2005,  the administration                                                               
advised  BP   that  although  it  respected   the  importance  to                                                               
investors of  having competitive and  durable rules for  both oil                                                               
and gas in  the fiscal contract, it didn't see  the ELF regime as                                                               
properly suited as  a long-term solution.  The  concern being the                                                               
tax base underpinning ELF was  declining with time.  He explained                                                               
that  the concept  of a  PPT-type structure  was proposed  by the                                                               
administration to  fix the so-called  ELF problem.   BP responded                                                               
that if  populated with balanced  numbers, PPT could be  a viable                                                               
long-term  structure  with  potentially positive  attributes  for                                                               
both the  state and the industry.   In this regard,  BP agreed to                                                               
move off its preferred position,  which was to simply utilize the                                                               
existing  ELF-based  system  for   the  duration  of  the  fiscal                                                               
contract.  At  that time, the mutually agreed upon  goals of both                                                               
sides  for  PPT  included:  all  barrels  should  be  subject  to                                                               
taxation, the  state should receive a  balanced and proportionate                                                               
share  of  the  price/profit upside,  and  additional  investment                                                               
should be stimulated to reduce long-term production decline.                                                                    
                                                                                                                                
2:32:12 PM                                                                                                                    
                                                                                                                                
MR. KONRAD  relayed that proposals were  discussed intermittently                                                               
through year-end, and  it was clear that there  was a significant                                                               
difference of opinion as to  what numbers would create a balanced                                                               
PPT that met these goals.   During that time, the State of Alaska                                                               
initially  proposed and  held  to a  20 percent  tax  rate.   The                                                               
sponsor group had  proposed a tax rate of 12.5  percent, which BP                                                               
estimated  would  have  increased  State of  Alaska  revenues  by                                                               
hundreds of  millions of dollars  per year at current  prices and                                                               
tens of billions  of dollars over the long term  relative to ELF.                                                               
BP believes that  it would also have  stimulated more investment,                                                               
more jobs, and most critically, more long-term production.                                                                      
                                                                                                                                
MR. KONRAD  stated that on  Saturday, February 18th,  following a                                                               
long and, at  times, difficult negotiation, BP was  able to agree                                                               
[with the  administration] and  conclude the  gas portion  of the                                                               
fiscal  contract with  the state.    The following  day, BP  made                                                               
another PPT  proposal for  the Alaska to  consider in  advance of                                                               
the planned executive  meeting.  He said that  this proposal made                                                               
a very  substantial move  towards the  administration's position,                                                               
while providing  more support  for investors  at low  to moderate                                                               
prices, where  everyone agrees  Alaska investments  are extremely                                                               
challenged.  On  Monday, February 20th, the  governor outlined to                                                               
BP executives his  20/20 PPT proposal.  The proposal  BP had made                                                               
to  the administration  the  day  before was  rejected.   BP  has                                                               
agreed  with the  governor  that  it will  not  oppose rates  and                                                               
figures  in  the proposed  PPT  legislation.    BP has  made  the                                                               
extremely difficult decision to accept  the governor's terms as a                                                               
means to finalize  a fiscal contract.  BP believes  that this PPT                                                               
is  at  the  far  outer  fringe  of what  should  be  seen  as  a                                                               
reasonable or plausible  range of outcomes.  He  remarked that BP                                                               
also  needs to  be very  frank  with this  legislature by  saying                                                               
upfront  that  it  doesn't  believe  the  20  percent  rate  will                                                               
maximize  investment or  in turn  maximize long-term  production.                                                               
He opined that although the  PPT structure has significant merit,                                                               
and  BP  supports  it,  the  overall size  of  the  tax  increase                                                               
outweighs other benefits and goes well beyond optimum.                                                                          
                                                                                                                                
2:35:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR RAMRAS asked what happened with TAPS 30 years ago.                                                                     
                                                                                                                                
TOM WILLIAMS,  Alaska Tax Counsel,  BP, explained that  there's a                                                               
list of one dozen changes that  were made in the decade after the                                                               
pipe  was  ordered  in  1968   that  impacted  Prudhoe  Bay,  the                                                               
pipeline, or  both.  He noted  that the changes are  published in                                                               
the  Anchorage  Chamber  of  Commerce  report.   There  was  a  3                                                               
percent/4 percent  severance tax and disaster  severance tax that                                                               
had been enacted  following the flood in Fairbanks.   It replaced                                                               
a stepped-rate severance tax/consolidated  severance tax in 1972.                                                               
There was  also a cents  per barrel floor that  was put in  and a                                                               
credit for state  royalties on the cents per  barrel floor, which                                                               
had the  effect of setting  a floor  on the combined  royalty and                                                               
severance tax revenues.  In  1973, after there was legislation in                                                               
Congress and threatened legislation  in Congress about the delays                                                               
over  building the  oil  pipeline due  to  litigation, a  special                                                               
session was called  by Governor Egan, in which  AS 43.56 property                                                               
tax was enacted.  In  addition, the conservation tax was enacted,                                                               
the right-of-way  leasing act was  amended, the cents  per barrel                                                               
royalty  credit was  repealed, and  the rates  were changed.   In                                                               
1974/1975,  the severance  tax was  changed  to say  that if  the                                                               
sales  price that  someone is  selling  his/her oil  and gas  for                                                               
doesn't  represent the  prevailing  value,  the department  could                                                               
require  the tax  to  be paid  on the  basis  of that  prevailing                                                               
value.   Previously,  it  had  been on  the  basis of  prevailing                                                               
price.   Also in 1975, there  was an enactment of  a temporary 2-                                                               
year tax on oil  and gas reserves.  In 1977,  ELF was enacted and                                                               
a tax increase  replacing these tiered steps with a  base rate of                                                               
12.25  percent times  the ELF  for  oil, and  a base  rate of  10                                                               
percent for  gas, with  a slight different  ELF formula  for ELF.                                                               
In  1978, there  was separate  accounting.   He added  that there                                                               
were  also a  couple  of changes  to the  income  tax, which  had                                                               
impacts on  Prudhoe Bay.   They were  not directly  targeted, but                                                               
they did have adverse effects.                                                                                                  
                                                                                                                                
2:38:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ  inquired as to  who was present  at the                                                               
PPT negotiations.                                                                                                               
                                                                                                                                
MR.  KONRAD responded  that  BP,  ConocoPhillips, and  ExxonMobil                                                               
were   present  at   the  PPT   negotiations,   along  with   the                                                               
administration.                                                                                                                 
                                                                                                                                
REPRESENTATIVE  BERKOWITZ  inquired  as   to  whether  it's  BP's                                                               
understanding that the legislature establishes the tax.                                                                         
                                                                                                                                
MR. KONRAD confirmed yes and added  that it was always the intent                                                               
that the legislature would endorse and approve [the tax].                                                                       
                                                                                                                                
REPRESENTATIVE BERKOWITZ  expressed his concern in  regard to Mr.                                                               
Konrad's characterization of this as a negotiation.                                                                             
                                                                                                                                
MR.   KONRAD  clarified   that  BP   was  negotiating   with  the                                                               
administration.                                                                                                                 
                                                                                                                                
CO-CHAIR SAMUELS  clarified that HB  488 is before  the committee                                                               
and the legislature will make the final determination.                                                                          
                                                                                                                                
2:41:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CRAWFORD  relayed that  he's not convinced  that a                                                               
20/20  regime is  the correct  one.   It  seems to  him that  the                                                               
higher  the  legislature makes  the  credit,  the more  incentive                                                               
there  is for  companies to  drill  and produce.   Therefore,  he                                                               
surmised  that  the  legislature  should  possibly  increase  the                                                               
credit.  He  said that BP stated that at  12.5 percent, the State                                                               
of  Alaska would  maximize its  tax dollars  or revenue  over the                                                               
long term.   In  regard to  the 12.5 percent  tax rate,  he noted                                                               
that he'd like to  see the charts that BP used  to make that case                                                               
during  negotiations with  the  governor.   He  remarked that  he                                                               
wants to maximize the revenue for  the State of Alaska as well as                                                               
have a  healthy oil industry.   He reiterated that he  would like                                                               
to see BP's  charts that exemplified how a 12.5  percent tax rate                                                               
would be more beneficial than a 20 percent tax rate.                                                                            
                                                                                                                                
MR. KONRAD clarified that BP  thought [the 12.5 percent] tax rate                                                               
would maximize investment, not that it was optimum.                                                                             
                                                                                                                                
REPRESENTATIVE CROFT,  in regard to  what happened in  the 1970s,                                                               
explained that  the State  of Alaska  had a  tax system  for Cook                                                               
Inlet, which  was not  ready for  Prudhoe Bay.   He said  that he                                                               
keeps hearing the idea that  the legislature needs to lock-in and                                                               
take away the right to change  the tax structure for 30 years, or                                                               
some discrete period of time,  because of something that happened                                                               
in the 1970s.  He inquired  as to whether it's BP's position that                                                               
changes in the  1970s created a tax regime for  the pipeline that                                                               
it couldn't make  an adequate profit on.  He  added that it seems                                                               
to  him  there  has  been  a  "pretty  unbroken  series"  of  tax                                                               
concessions.   He said that  every time the industry  has brought                                                               
forward  a particular  instance  in which  a  tax concession  was                                                               
needed, the legislature responded.                                                                                              
                                                                                                                                
2:47:33 PM                                                                                                                    
                                                                                                                                
MR.  KONRAD responded  that the  gas pipeline  is a  large, risky                                                               
project and  that stability  and risk  reduction is  important to                                                               
that project.                                                                                                                   
                                                                                                                                
REPRESENTATIVE CROFT noted that the  legislature has been able to                                                               
establish  a tax  structure which  is responsible  as well  as to                                                               
give concessions  where they're  needed over  the last  30 years,                                                               
and he  believes that the legislature  will be able to  do so [in                                                               
the future].                                                                                                                    
                                                                                                                                
2:48:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON, in regard to  HB 488 pertaining to oil and                                                               
gas, mentioned that  he was presuming that the  tax structure for                                                               
ANS pipeline  gas would be  negotiated at  a different time.   He                                                               
remarked that what  he's hearing from BP is that  even though the                                                               
base tax  rate of oil  is 12.5 percent and  the base tax  rate of                                                               
gas  is  10 percent,  in  rolling  gas  into  the PPT  bill,  the                                                               
consideration isn't on  current production of gas,  rather on the                                                               
future [production  of gas].   He questioned whether BP  is going                                                               
to analyze PPT  as it applies to gas production  and whether it's                                                               
beneficial, other than in the case of a potential pipeline.                                                                     
                                                                                                                                
MR. KONRAD answered that today BP  plans to focus entirely on oil                                                               
and  added  that it  expects  to  begin  debate when  the  fiscal                                                               
contract is released in 2-3 weeks.                                                                                              
                                                                                                                                
2:50:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  explained that  his problem with  the bill                                                               
is  that there  is  a tax  on  both oil  and gas  and  no one  is                                                               
discussing  the  ramifications of  PPT  on  gas  in Alaska.    He                                                               
expressed his concern  regarding rolling gas into  HB 488 without                                                               
any known  analysis to the  committee of  what the effect  on the                                                               
current gas  industry would  be.   He noted that  ELF for  gas is                                                               
different than ELF for oil.                                                                                                     
                                                                                                                                
CO-CHAIR   SAMUELS  interjected   that  Representative   Seaton's                                                               
question would be more appropriate for DOR.                                                                                     
                                                                                                                                
2:51:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS mentioned  that  BP only  produces  gas on  the                                                               
North Slope.                                                                                                                    
                                                                                                                                
MR.  KONRAD confirmed  that BP  only  produces gas  on the  North                                                               
Slope.                                                                                                                          
                                                                                                                                
REPRESENTATIVE SEATON asked whether BP  cares that current gas is                                                               
in HB 488.                                                                                                                      
                                                                                                                                
MR. KONRAD said BP does care that current gas is in HB 488.                                                                     
                                                                                                                                
REPRESENTATIVE SEATON surmised that BP  is only interested in gas                                                               
in  relation  to  a  future  contract, not  in  the  current  gas                                                               
production.                                                                                                                     
                                                                                                                                
MR. KONRAD corrected  that BP is interested in all  of it because                                                               
of the common goal.                                                                                                             
                                                                                                                                
CO-CHAIR SAMUELS added  that BP's gas tax structure will  be in a                                                               
contract.                                                                                                                       
                                                                                                                                
MR.  KONRAD  further added  that  it's  also important  that  the                                                               
industry be successful  because BP is designing  a project that's                                                               
dependent on a  third of its throughput from gas  that hasn't yet                                                               
been found and developed.                                                                                                       
                                                                                                                                
2:53:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG  mentioned  that  as  a  member  of  the                                                               
Anchorage business  community in the  1960s and 1970s,  there was                                                               
significant  discussion  regarding  the   lack  of  stability  of                                                               
petroleum  taxes at  that  time.   He  added  that other  factors                                                               
included:   stop  and start,  ability  to move  forward on  TAPS,                                                               
typical oil patch problems, and volatility of prices.                                                                           
                                                                                                                                
2:55:09 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  requested that  Mr. Konrad state  BP's position                                                               
on  the  connectivity between  [HB  488]  and the  gas  contract,                                                               
realizing that  the legislature could  pass [HB 488] and  vote no                                                               
on connectivity.  The legislature  could also pass [HB 488], vote                                                               
yes on connectivity, and no  on the gas pipeline contract because                                                               
it doesn't like that particular contract.                                                                                       
                                                                                                                                
2:56:37 PM                                                                                                                    
                                                                                                                                
MR. KONRAD  informed the committee  that BP supports  full review                                                               
of   anything   related   to   the   fiscal   contract   by   the                                                               
administration, full  legislature, the people of  Alaska, and the                                                               
court systems.   He remarked that  has nothing to do  with fiscal                                                               
stability,  rather being  competitive  and attracting  investment                                                               
for 40  more years.   Because this is  a large, quite  risky, and                                                               
low  return investment,  BP is  trying  to reduce  the risks  and                                                               
fiscal stability  of its  payments is  important in  allowing the                                                               
project to advance.                                                                                                             
                                                                                                                                
REPRESENTATIVE CRAWFORD  inquired as  to how  HB 488  will affect                                                               
gas.                                                                                                                            
                                                                                                                                
CO-CHAIR SAMUELS asked BP's view if there isn't a gasline.                                                                      
                                                                                                                                
2:59:49 PM                                                                                                                    
                                                                                                                                
MR. KONRAD, in response to  Representative Crawford, informed the                                                               
committee that BP doesn't have gas in Cook Inlet or Nenana.                                                                     
                                                                                                                                
CO-CHAIR SAMUELS  asked what BP's  view would be on  the language                                                               
on gas  in HB488 if a  liquified natural gas (LNG)  line or third                                                               
party pipeline were proposed.                                                                                                   
                                                                                                                                
MR. KONRAD said BP hasn't looked at it through that lens.                                                                       
                                                                                                                                
3:01:32 PM                                                                                                                    
                                                                                                                                
ANGUS WALKER,  Commercial Vice President,  BP Alaska,  noted that                                                               
BP only  has leases on the  North Slope and in  the Beaufort Sea.                                                               
He referred to  slide 1, a profile of  historical production from                                                               
1977 through 2005.  The North  Slope has produced over 15 billion                                                               
barrels of oil to date, and while  BP looks back with envy at the                                                               
days of peak  production, it is clear that the  business today is                                                               
very  different than  it was  20 years  ago.   He stated  that to                                                               
date, BP has  invested $24 billion to create  the Alaska business                                                               
existing  today.   BP has  paid over  $32 billion  of tax  to the                                                               
State  of  Alaska   and  $24  billion  of  tax   to  the  federal                                                               
government.    In  total,  BP  estimates  that  the  North  Slope                                                               
participants have generated  $120 billion in taxes  for the State                                                               
of Alaska  and the federal  government since first  production in                                                               
1977.   In addition, as  an industry,  more than 34,000  jobs are                                                               
generated in Alaska every year.                                                                                                 
                                                                                                                                
3:05:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ  inquired as to  how much profit  BP has                                                               
made during that time period.                                                                                                   
                                                                                                                                
MR.  WALKER responded  that  he doesn't  have  that number  [with                                                               
him], but would be able to make it available.                                                                                   
                                                                                                                                
3:06:05 PM                                                                                                                    
                                                                                                                                
MR.  WALKER  continued  that  the harsh  reality  is  that  since                                                               
production peaked in 1988, production  has declined at an average                                                               
of 6 percent.   He noted that natural decline  of these fields is                                                               
around 15 percent.  The industry  has managed to stem decline to,                                                               
on average,  6 percent over the  last ten years by  investing $1-                                                               
$1.5 billion per year in the  North Slope [oil and gas] business.                                                               
He stated that  ELF has worked as intended.   Many of the smaller                                                               
fields on the  North Slope would not have  been developed without                                                               
ELF.   While not all of  this production pays production  tax, it                                                               
all  pays property  tax and  royalty and  state income  tax.   He                                                               
remarked that  ELF has and  continues to encourage  investment in                                                               
these  small  or  less  productive   fields,  and  has  played  a                                                               
significant  role  in  stemming   overall  North  Slope  decline.                                                               
However, BP recognizes  that ELF was designed as  a surrogate for                                                               
profitability and while it has  been effective, it is not perfect                                                               
in today's price  environment.  It is for that  reason that BP is                                                               
supportive  of  adopting  the  PPT   structure  proposed  by  the                                                               
administration.                                                                                                                 
                                                                                                                                
3:07:43 PM                                                                                                                    
                                                                                                                                
MR. WALKER relayed that one of  the most important issues for the                                                               
committee to consider is the impact  PPT will have on the decline                                                               
of the  Alaska North Slope.   He referred  to slide 2  from Roger                                                               
Marks' presentation  last week.   He explained that it  shows two                                                               
forecasts  of  future  production   -  the  lower  blue  forecast                                                               
represents  a  future  without  gas   and  the  upper  pink  line                                                               
represents  a future  where the  oil business  is revitalized  by                                                               
gas.  In response to  Representative Croft, he clarified that the                                                               
blue line is without a gas line.                                                                                                
                                                                                                                                
CO-CHAIR SAMUELS  added that doesn't  include the barrels  of oil                                                               
equivalent  (BOE), just  the excess  oil  stimulated through  gas                                                               
exploration and development.                                                                                                    
                                                                                                                                
MR. WALKER confirmed that Co-Chair  Samuels was correct and added                                                               
that he is referring to oil only.                                                                                               
                                                                                                                                
3:09:07 PM                                                                                                                    
                                                                                                                                
MR.  WALKER, in  regard to  what  it will  take to  keep the  oil                                                               
business healthy, said the simple answer  is to stem decline.  He                                                               
explained that the black line on  slide 3 displays the history of                                                               
North Slope production and the  colored lines look forward to the                                                               
future.   With no investment,  the natural decline of  the fields                                                               
would be  the lower red  line and  within 10 years,  the business                                                               
would be gone.   In response to Representative  Croft, he further                                                               
explained that the slide represents  the North Slope in totality.                                                               
The production  is gross  production on the  North Slope  and the                                                               
investments are gross investments by industry.                                                                                  
                                                                                                                                
3:11:24 PM                                                                                                                    
                                                                                                                                
MR.  WALKER  mentioned that  the  green  line assumes  that  [the                                                               
industry]  carries  on investing  at  the  rate it  is  currently                                                               
investing,  which is  $1-$1.5 billion  per year  and the  decline                                                               
continues  along the  same historic  trend.   [The industry]  has                                                               
declined at  an average  of 6  percent per year  for the  last 15                                                               
years.  He added that there's  no reason to believe that wouldn't                                                               
be the  same story in  the future  with the same  investment into                                                               
the industry.   In that scenario, the industry has  a life out to                                                               
2025,  which  he noted  is  not  long  enough  to support  a  gas                                                               
pipeline project.  In order  to support the gas pipeline project,                                                               
he said  that the oil business  needs to be healthy  and the life                                                               
of the oil business has to be  extended for as long as possible -                                                               
at  least until  2050.    The oil  industry  would  need to  stem                                                               
decline of the  North Slope to an average of  3 percent per year,                                                               
which BP  estimates would require  $2-$3 billion of capital  - or                                                               
twice the capital  that's currently being invested.   In response                                                               
to Representative  Guttenberg, he  clarified that  the assumption                                                               
in the  case of the red  line/zero investment line is  that there                                                               
are  no new  oil fields;  in  the case  of  the 3  and 6  percent                                                               
decline  lines, with  higher investments,  that  oil will  either                                                               
come  from the  existing  fields, or  it may  come  from new  oil                                                               
fields.                                                                                                                         
                                                                                                                                
3:13:47 PM                                                                                                                    
                                                                                                                                
MR.  WALKER  relayed that  BP  shares  the challenge  of  keeping                                                               
Alaska  competitive  and  believes   that  Alaska's  part  is  to                                                               
maintain  stability and  keep it  attractive to  investors, while                                                               
the  industry's part  is to  provide technology,  innovation, and                                                               
investment.   In  BP's opinion,  the tax  regime the  legislature                                                               
approves will directly  impact how attractive Alaska  is and what                                                               
the future decline will be.   He opined that it's in the interest                                                               
of all that  Alaska focus on growing the pie,  rather than taking                                                               
an  increasing share  of a  declining pie.   In  response to  the                                                               
question,  where will  the industry  find  all this  oil to  stem                                                               
decline, he  said Alaska has a  huge resource base.   To date, BP                                                               
has  produced 15  billion  barrels, but  there  are 17.5  billion                                                               
barrels remaining that  it's aware of.  The  remaining 14 billion                                                               
barrels consist  of:   3.5 billion  barrels of  light oil  in the                                                               
existing reservoirs,  1 billion barrels  of viscous oil  which BP                                                               
has started to  produce, 3 billion barrels of heavy  oil lying in                                                               
shallow formations  below the permafrost,  and 6  billion barrels                                                               
of gas which BP is working "so hard" to get to market.                                                                          
                                                                                                                                
3:15:34 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  added that currently  in the bill,  there isn't                                                               
an exclusion  or extra tax  credit for  heavy oil.   He explained                                                               
that  in  Alaska,  there  is   a  method  for  royalty  reduction                                                               
negotiations.  He said that  instead of talking about a different                                                               
tax/cost recovery method for heavy  oil, where there already is a                                                               
royalty reduction,  and realizing  that the  chances of  making a                                                               
profit  are smaller,  the State  of Alaska  wants to  incentivize                                                               
that through a  royalty reduction, rather than  going through the                                                               
battle  of cost-shifting  back  and forth  and  a constant  fight                                                               
between the industry and the State  of Alaska.  He asked, "Do you                                                               
think that's a realistic "big picture"  view of how [the State of                                                               
Alaska]  could  incentivize  the heavy  oil  development  through                                                               
royalty reduction, rather than cost recovery?"                                                                                  
                                                                                                                                
3:17:12 PM                                                                                                                    
                                                                                                                                
MR. WALKER responded that BP  considered very long and hard about                                                               
whether there should  be a separate credit for  viscous heavy oil                                                               
versus conventional  activity, and  it recommended  very strongly                                                               
to the administration that that be  the case.  He opined that all                                                               
of the  work of  the analysts  has shown  that heavy  and viscous                                                               
oils are very  difficult to produce and need extra  help.  Having                                                               
different  levels  of  credit  would work  because  it  has  very                                                               
capable processes in place for  tracking where it spends capital.                                                               
In regard  to royalty relief,  he stated that many  countries are                                                               
introducing either  royalty abolition or royalty  reduction where                                                               
they  want to  stimulate activity  on an  enduring basis.   As  a                                                               
result, investors  can make large  investments, knowing  what the                                                               
rules are  for the future.   He  said, "Absolutely, if  you could                                                               
find a  way of changing royalty  and make that enduring,  then it                                                               
would be a very effective thing to do."                                                                                         
                                                                                                                                
3:18:42 PM                                                                                                                    
                                                                                                                                
MR.  WALKER  continued that  the  scale  of this  known  resource                                                               
greatly exceeds  that expected from  future exploration.   Future                                                               
discoveries are  expected to  be of the  order of  50-150 million                                                               
barrels.  He  noted that it's not to say  that exploration should                                                               
stop, rather exploration  to stem the decline of  the North Slope                                                               
can't  be  relied  upon.     While  BP  isn't  exploring  in  the                                                               
conventional  sense,  it is  adding  barrels.    BP is  not  only                                                               
looking to  develop its  share of the  1.75 billion  barrels, but                                                               
it's  also  looking to  make  it  even  bigger.   Every  time  BP                                                               
increases the recovery efficiency by  just 1 percent, it accesses                                                               
an  additional  600 million  barrels.    He  noted that  every  1                                                               
percent is equivalent to another Alpine.                                                                                        
                                                                                                                                
3:19:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CROFT  asked what  Mr. Walker  meant when  he said                                                               
that BP is not exploring in the traditional sense.                                                                              
                                                                                                                                
MR. WALKER answered  that BP is exploring in the  sense that it's                                                               
spending  large  amounts  of   its  capital  applying  innovative                                                               
technologies  within  the  boundaries   of  the  field  which  it                                                               
currently operates.   He  added that  some of  these technologies                                                               
are risky.   For example, the  $100 million BP is  going to spend                                                               
at  Endicott on  its innovative  EOR program.   If  it works,  BP                                                               
could apply that across the whole of the North Slope.                                                                           
                                                                                                                                
REPRESENTATIVE CROFT  stated that a  tax regime has  a particular                                                               
effect on the level of  investment.  Expanding the exploration in                                                               
the summer or  a reduction in the TAPS tariff  would have as much                                                               
impact, particularly those  two combined, as a change  in the tax                                                               
structure.   He  said tax  structure  isn't the  only thing  that                                                               
moves  the legislature  along those  lines -  there's significant                                                               
things that the legislature can do  in terms of regulations or in                                                               
terms of the cost of bringing the oil to market.                                                                                
                                                                                                                                
3:21:59 PM                                                                                                                    
                                                                                                                                
MR. WALKER remarked that  at the end of the day,  BP needs to get                                                               
more barrels  through the pipeline and  whatever it can do  to do                                                               
so helps.   Some of that  is going to come  from exploration, but                                                               
the  United States  Geological Survey  (USGS), on  every resource                                                               
assessment that  BP has seen, says  that it doesn't have  the big                                                               
exploration  prospects or  fields  left to  be  found in  Alaska.                                                               
Therefore, the  explorers will  be finding  things, and  BP hopes                                                               
they  find things  because it  wants them  to fill  up TAPS.   He                                                               
added that  BP wants them to  keep as much oil  going through the                                                               
system as possible.   He further added that the  harsh reality is                                                               
that BP can't rely on exploration, but it will help.                                                                            
                                                                                                                                
REPRESENTATIVE  CROFT inquired  as to  whether reducing  the TAPS                                                               
tariff would help fill the [pipe]line.                                                                                          
                                                                                                                                
MR. WALKER  said the  TAPS tariff  is set  by the  tax settlement                                                               
methodology (TSM) and reflects the costs of running TAPS.                                                                       
                                                                                                                                
REPRESENTATIVE CROFT  asked whether  a reduction would  help spur                                                               
innovation.                                                                                                                     
                                                                                                                                
MR. WALKER  surmised that  it would,  theoretically, if  that was                                                               
the appropriate thing to do.                                                                                                    
                                                                                                                                
3:23:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA  stated that  Mr.  Walker  talked about  the                                                               
possibility of a different tax on  heavy oil than regular oil and                                                               
the way the  proposal is currently structured, it's  the same tax                                                               
regardless  of whether  the oil  is heavy  or light.   He  asked,                                                               
"What would you say about a  system that taxed conventional oil a                                                               
little  bit  higher  than  is  being proposed,  but  then  had  a                                                               
special, lower tax for harder to develop fields and heavy oil?"                                                                 
                                                                                                                                
MR.  WALKER acknowledged  that there  are  many other  structures                                                               
that could be thought of and BP is open to consider those.                                                                      
                                                                                                                                
REPRESENTATIVE  GARA mentioned  that  he's heard  generalizations                                                               
regarding the price  of oil which is necessary to  make heavy oil                                                               
commercially  viable.   Acknowledging  that  it's different  from                                                               
field to field,  he requested a "general thumbnail"  of the price                                                               
at  which BP  believes that  heavy  oil production  on the  North                                                               
Slope would be profitable.                                                                                                      
                                                                                                                                
MR.  WALKER responded  that  it's very  different  from field  to                                                               
field.   He surmised that  Pedro van Meurs' analysis  showed that                                                               
the  point  at   which  one  can  make  heavy   oil  economic  is                                                               
significantly higher than  it is for conventional  oil because of                                                               
the course and flow rates involved.                                                                                             
                                                                                                                                
3:25:04 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS  asked  what  BP  thought  would  be  the  most                                                               
efficient way,  if it was  cost neutral, to avoid  the litigation                                                               
and  the  constant  conflict  between the  State  of  Alaska  and                                                               
industry, if the legislature wanted to incentivize heavy oil.                                                                   
                                                                                                                                
MR. WALKER  answered something  that is clear  and durable.   The                                                               
abolition  of  royalty  would  be clear,  durable,  and  easy  to                                                               
administer.  As soon as  complexities are introduced, the systems                                                               
have to  be designed  to match.   He opined  that systems  can be                                                               
managed where  costs for  different fields  are being  tracked in                                                               
order  that the  credit  system  BP proposed  would  be the  next                                                               
easiest thing  to administer, and  the final complexity  would be                                                               
having different  tax rates for  different fields.   He clarified                                                               
the order  - royalty abolition,  then differential  credits, then                                                               
different  tax   rates.    He  acknowledged   the  importance  of                                                               
something that genuinely stimulates investment.                                                                                 
                                                                                                                                
3:26:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   ROKEBERG  opined   that   it's   time  for   the                                                               
legislature to  negotiate with the  producers.  He  expressed his                                                               
interest in  a proposal  that would  increase the  tax rate  as a                                                               
matter  of progressivity  on  the  high side,  and  to raise  tax                                                               
incentives for viscous oil, heavy  oil, and frontier exploration.                                                               
He asked, "Could  we not balance that by keeping  within the same                                                               
structure?"  He  added that therefore, there's  a linkage between                                                               
any  tax increase  with a  credit increase  outside the  realm of                                                               
royalty reduction because those wouldn't  be in the same specific                                                               
area  of taxation.    He  further asked,  "Should  we balance  it                                                               
within this bill?"                                                                                                              
                                                                                                                                
3:28:30 PM                                                                                                                    
                                                                                                                                
MR. WALKER  replied that there  are many  levers in [HB  488] and                                                               
the  governor's proposal  sets all  of  the levers  in a  certain                                                               
place.  He  mentioned that it's important that  it's balanced and                                                               
there  is an  enduring  tax  system that  is  able  to offer  the                                                               
appropriate compensation for  those who take a  risk by investing                                                               
in the industry.                                                                                                                
                                                                                                                                
3:29:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  CRAWFORD, in  regard  to  enduring, attempted  to                                                               
clarify whether  Mr. Walker is  referring to the ceiling  and not                                                               
the floor on taxes.                                                                                                             
                                                                                                                                
MR. WALKER said  that it's within [the  legislature's] purview to                                                               
offer incentives to stimulate any particular activity.                                                                          
                                                                                                                                
3:30:08 PM                                                                                                                    
                                                                                                                                
MR. WALKER informed the committee  that to develop the 14 billion                                                               
barrels that BP knows about would  require well in excess of $100                                                               
billion.   He noted that  kind of  investment can only  come from                                                               
the major oil companies of the world.  He said:                                                                                 
                                                                                                                                
     It  thus mystifies  us  why so  much  of the  testimony                                                                    
     given to this  committee by Pedro van  Meurs focused on                                                                    
     the impact  of PPT on  new entrants when the  future of                                                                    
     the  North   Slope  is   dependent  on   making  Alaska                                                                    
     attractive to major oil companies.                                                                                         
                                                                                                                                
MR. WALKER  concluded that this  is the reality of  the industry,                                                               
the 6  percent decline,  and the  large capital  investments that                                                               
the industry is going to have to make to stem that decline.                                                                     
                                                                                                                                
3:31:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO,  in response  to $100 billion  to [develop]                                                               
14 billion  barrels, surmised  that the first  barrel would  be a                                                               
lot cheaper  than the last barrel,  and that BP has  no intention                                                               
of getting the very last barrel,  which he said could easily cost                                                               
$1  million.   He asked,  "In your  estimate of  that 14  billion                                                               
remaining, how much is a reasonable  amount to get out before you                                                               
just give up?"                                                                                                                  
                                                                                                                                
3:31:48 PM                                                                                                                    
                                                                                                                                
MR.  WALKER  clarified that  the  $100  million is  a  "headline"                                                               
number.   He said BP doesn't  know what it will  take and whether                                                               
it's  even possible  to  produce some  of  that oil.    With a  3                                                               
percent decline to 2050, BP  would produce 7.5 billion barrels of                                                               
the 17.5 [billion barrels] left.                                                                                                
                                                                                                                                
REPRESENTATIVE GATTO remarked that  the other oil, not classified                                                               
as heavy, but solid, that exists  on top is an enormous resource.                                                               
He asked, "Is  there anything that you have/that  anyone has even                                                               
suggested as a way  to tap into that, prior to  the time when you                                                               
simply exhausted your presence in Prudhoe Bay?"                                                                                 
                                                                                                                                
3:33:06 PM                                                                                                                    
                                                                                                                                
MR. WALKER acknowledged that is  a huge challenge to develop that                                                               
very heavy,  solid oil.   He noted that BP  has a team  of people                                                               
working  collaboratively  across the  industry.    [The team]  is                                                               
looking  at all  of the  technologies that  have been  applied in                                                               
Venezuela and Canada.   He added that over the  next 10 years, BP                                                               
is going  to conduct  a series  of pilots on  the North  Slope in                                                               
order  to test  which  technology is  appropriate  for the  North                                                               
Slope for implementation  in an Arctic environment  and the kinds                                                               
of reservoirs in  Alaska.  After that period of  trials, BP hopes                                                               
to have identified the technology and  the way it can apply it to                                                               
exploit  that resource  base.   He noted  that's a  huge resource                                                               
base  - 20  billion  barrels in  place.   At  the  moment, BP  is                                                               
assuming up  to 15 percent  recovery.  If one  is able to  get 25                                                               
percent of it, that would be an extra 2 billion barrels.                                                                        
                                                                                                                                
3:34:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA  stated  that   over  the  last  few  years,                                                               
according to  State of Alaska  projections, as oil has  gone from                                                               
$20  per barrel  to $60  per barrel,  profits have  increased six                                                               
fold  on the  North Slope  from  approximately $1  billion to  $7                                                               
billion this  year.   That hasn't  affected the  major producers'                                                               
investment  decisions  in a  similar  way  - investments  haven't                                                               
increased as much as profits have.   He asked, "What can you tell                                                               
us about why  they're giving you $73 million  tax-free under this                                                               
proposed bill,  and whether  that $73 million  in profit  that we                                                               
give you  tax-free will  lead to  increased investment  given the                                                               
track record?"                                                                                                                  
                                                                                                                                
MR. WALKER said that  the $73 million has not been  put in HB 488                                                               
for [BP's] benefit.  He said,  "We don't like it."  He elaborated                                                               
that the  $73 million provision  creates an uneven  playing field                                                               
for  the  incremental  investments   that  BP  makes  versus  the                                                               
incremental investments that a small company would make.                                                                        
                                                                                                                                
REPRESENTATIVE  GARA  said  that  the  additional  money  BP  has                                                               
received in  the past few  years hasn't increased  its investment                                                               
substantially.   He asked  whether he  is reasonable  in assuming                                                               
that  offering $73  million tax-free  in profit  won't lead  to a                                                               
substantial increase in investment.                                                                                             
                                                                                                                                
MR. WALKER informed  the committee that the inclusion  of the $73                                                               
million will  make no difference  to BP's investments  in Alaska.                                                               
He added  that the structure  of the tax, the  ultimate structure                                                               
of the fiscal  regime, will make a difference  in its investments                                                               
and the industry as a whole.                                                                                                    
                                                                                                                                
3:36:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ mentioned  his assumption  that BP  has                                                               
conducted an  analysis as  to the optimal  incentive.   He asked,                                                               
"If taxes  decreased to zero, would  you be able to  tell me that                                                               
all kinds of  development would happen in Alaska?"   He said, "Or                                                               
if  the  taxes increased  to  100  percent,  I'm sure  you'd  say                                                               
everything would stop  and there's a continuum along  these."  He                                                               
expressed  his  curiosity  in  regard   to  what  that  continuum                                                               
resembles for BP.                                                                                                               
                                                                                                                                
MR.  WALKER  responded that  it's  too  difficult because  BP  is                                                               
unable inform  [the legislature]  as to  the correct  structure -                                                               
where  the tipping  point is  when  BP gets  exactly the  correct                                                               
balance between  industry take  and state  take to  stimulate the                                                               
future that BP  desires.  He added that large  increases in taxes                                                               
won't attract large increases in investment in Alaska.                                                                          
                                                                                                                                
REPRESENTATIVE BERKOWITZ inquired as to  whether it would be less                                                               
true if  they are masked  with large increases in  tax incentives                                                               
for investment/exploration development.                                                                                         
                                                                                                                                
MR. WALKER replied that BP looks at  the package as a whole - the                                                               
increase  in  tax  with  the   benefit  that  it  would  get  for                                                               
investing.   He  noted  that BP  is  currently investing  between                                                               
$600-$700 million  per year, and $450  million of that is  in the                                                               
upstream, thus  it would  benefit from this  credit.   He relayed                                                               
that BP takes that into account when it calculates its tax.                                                                     
                                                                                                                                
REPRESENTATIVE BERKOWITZ expressed  his frustration regarding the                                                               
lack of  information provided  for the  legislature.   He relayed                                                               
that the  legislature doesn't know whether  a 15, 20, 25,  30, or                                                               
50 percent tax incentive makes a difference.                                                                                    
                                                                                                                                
MR. WALKER responded that BP  doesn't know what the balance point                                                               
is.   He mentioned that the  core principle is that  if taxes are                                                               
increased,  there  will  be a  reduction  in  investment  because                                                               
Alaska will be less competitive.                                                                                                
                                                                                                                                
3:40:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ, in  regard  to the  percent of  market                                                               
value,  described  the  "mother  of   all  models,"  which  is  a                                                               
combination  of  probability  and   outcome  determination.    He                                                               
relayed  that  it seems  to  him  that  when the  legislature  is                                                               
discussing billions  of dollars,  that somewhere someone  has run                                                               
that kind of modeling.  He  expressed his skepticism in regard to                                                               
that  kind   of  modeling  not   being  made  available   to  the                                                               
legislature, which  makes him question  a lot of  the assumptions                                                               
that are being put forward.                                                                                                     
                                                                                                                                
MR. WALKER  relayed that BP  is able to  model the impact  on its                                                               
business  with certain  development  scenarios.   He referred  to                                                               
DOR's production curves,  in which it has  modeled four different                                                               
cases  for  different  outcomes,   depending  on  the  amount  of                                                               
resource that's  developed.  He  added that BP can't  predict the                                                               
link between the fiscal regime,  the resource, and the investment                                                               
made, but there's definitely a link - it's cause-and-effect.                                                                    
                                                                                                                                
3:41:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ,  in  regard to  investment  decisions,                                                               
commented  that  the parameters  seem  to  revolve around  market                                                               
conditions,  cost of  extraction,  and the  fiscal  regime.   The                                                               
focus that the  legislature has had in the hearings  thus far has                                                               
solely been  on the  fiscal component  of it.   He said  that the                                                               
cost component  of extracting Alaska's resource  will decrease in                                                               
part  because the  TAPS settlement  is going  to be  restructured                                                               
shortly.   He noted that  there is  also a significant  change in                                                               
the market - there's no longer  highs of $30 [per barrel], rather                                                               
lows of $30 [per barrel] are  being projected.  He opined that in                                                               
that new regime,  there should be a greater  impact on investment                                                               
decisions and  whatever "tinkering" around the  legislature might                                                               
do with  the tax rates  on the margin in  the severance tax.   He                                                               
expressed his  wish that there'd  be more attention paid  to that                                                               
component  of  BP's  investment  decisions,  rather  than  solely                                                               
making  it seem  as if  the legislature  "tinkers" with  5 or  10                                                               
percent on the severance tax.                                                                                                   
                                                                                                                                
MR. WALKER corrected that the  legislature isn't "tinkering" with                                                               
it, rather  doubling it, and even  tripling it if BP  were not to                                                               
invest.   It's a significant  increase in  tax and the  burden on                                                               
the industry.   He  reiterated that  he is  unable to  inform the                                                               
committee as to what the link  is between the increase in tax and                                                               
BP's investment,  or the tax  reduction and  what it does  to the                                                               
investment, but assured the committee that there's a link.                                                                      
                                                                                                                                
3:43:43 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS commented  that Mr. Walker is  correct in saying                                                               
that  the  legislature  is considering,  depending  on  what  the                                                               
effective tax rate is, doubling  or tripling it, depending on the                                                               
investment level.   He clarified  that the total  government take                                                               
is  not being  doubled  or  tripled, it's  5-10  percent and  the                                                               
legislature is only tweaking one component.                                                                                     
                                                                                                                                
3:44:57 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  RAMRAS asked  what the  severance tax  rate is  that BP                                                               
pays when it aggregates its Alaska oil fields.                                                                                  
                                                                                                                                
MR. WALKER  answered that it's  currently 5.5 percent.   He noted                                                               
that  under  the  20/20  provision, it  would  increase  to  13.2                                                               
percent.   If BP chose not  to invest capital in  that year, then                                                               
it would be 17 percent.                                                                                                         
                                                                                                                                
CO-CHAIR RAMRAS  further asked, "If  you chose not to  invest any                                                               
capital, why wouldn't it be 20 percent?"                                                                                        
                                                                                                                                
MR. WALKER answered because BP  receives deductions for operating                                                               
expenses.                                                                                                                       
                                                                                                                                
3:46:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ remarked  that  the operating  expenses                                                               
are currently  deductible under  the corporate  income tax.   The                                                               
deductible under  the federal  income tax is  the basis  for BP's                                                               
state corporate  income tax, and then  there's another subsequent                                                               
opportunity to deduct the operating expenses again.                                                                             
                                                                                                                                
MR. WILLIAMS  explained that  it's a different  tax.   BP deducts                                                               
its  expenses  for  state  income  tax  and  federal  income  tax                                                               
purposes -  two different taxes.   If one is taxing  a net income                                                               
or profit,  then in order to  calculate that, one has  to look at                                                               
what the  expenses are.  He  remarked that if as  a philosophical                                                               
matter, that's unacceptable,  this structure isn't a  good one to                                                               
be pursuing.   He added that it's a function  of the structure of                                                               
the proposal  before the committee  - it's  on net value,  not on                                                               
gross value.  The ELF was  the gross value approach in attempt to                                                               
deal with rising costs over time.   The PPT structure attempts to                                                               
deal  with rising  costs directly  by subtracting  them out.   He                                                               
noted  that it's  the standard  of measure  that the  legislature                                                               
chooses to use on which its going to levy the tax.                                                                              
                                                                                                                                
3:47:40 PM                                                                                                                    
                                                                                                                                
MR. WALKER, in response to  Representative Seaton, explained that                                                               
the pink  on slide 5 is  the assumption that once  a gas pipeline                                                               
is built,  BP will  want to fill  its capacity in  it.   He added                                                               
that is  yet to  find gas.   He noted  that slide  5, "A  50 year                                                               
vision," is the graphic BP uses  when it describes its vision for                                                               
its business  in Alaska.   It displays  BP's net  production from                                                               
the Alaska North Slope from 1977 to  what it hopes it will be out                                                               
to 2050.   He said  that the future  will be very  different than                                                               
the past  with three businesses  - light oil,  viscous/heavy oil,                                                               
and  gas -  built on  top of  each other,  all of  which must  be                                                               
healthy.  He noted that in  the past, there was only one business                                                               
- the light oil business.                                                                                                       
                                                                                                                                
3:49:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  RAMRAS  requested  that  Mr.  Walker  explain  how  the                                                               
transition provision is strategic in this 50-year vision.                                                                       
                                                                                                                                
MR. WALKER  responded that the  transition provisions in  the PPT                                                               
bill  aren't  strategic  over  a   vision  for  50  years.    The                                                               
transition provisions  are a recognition of  the very significant                                                               
increase in tax that the  PPT bill represents, and a compensation                                                               
for the fact that BP had made some very large investments.                                                                      
                                                                                                                                
CO-CHAIR RAMRAS inquired  as to whether Mr. Walker  would be able                                                               
to quantify how much that was over the last five years.                                                                         
                                                                                                                                
MR. WALKER  replied that over the  last five years, BP  has spent                                                               
$3.5 billion, $2.4 billion of  which was in the upstream business                                                               
and   therefore,  would   carry  forward   from  the   transition                                                               
provisions which are in the bill.                                                                                               
                                                                                                                                
3:51:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ,   in  regard  to  the   $2.4  billion,                                                               
questioned whether any of it  has been accommodated under the ELF                                                               
structure.   He  noted that  some of  that $2.4  billion is  five                                                               
years old  and has  had five  years of benefiting  from ELF.   He                                                               
opined that there should be some "laddering".                                                                                   
                                                                                                                                
MR. WALKER clarified that the five  years is a recognition of the                                                               
significance of  the tax increase  and with BP having  made major                                                               
investments, it  softens the "blow"  of it.   He noted  that it's                                                               
part of the package which was negotiated with the governor.                                                                     
                                                                                                                                
REPRESENTATIVE GARA commented that it's  his position that in the                                                               
past  five   years,  BP  has  benefited   financially  from  [the                                                               
legislature's] decision to under-tax its  oil.  He suggested that                                                               
Mr. Walker explain how [the five years] isn't a second benefit.                                                                 
                                                                                                                                
MR.  WALKER  informed the  committee  that  BP doesn't  make  any                                                               
profit at low  [oil] prices.  At $20 [per  barrel], BP makes zero                                                               
profit.  BP is  in Alaska because in the "good  years" it makes a                                                               
decent  profit.   He relayed  that  BP has  to have  a few  "good                                                               
years" to compensate for the "lean years."                                                                                      
                                                                                                                                
3:53:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  CROFT  described  his   conception  that  in  the                                                               
decline of major oil fields,  independents become more important.                                                               
He asked,  "Why am I  mistaken about that  for Prudhoe Bay?"   He                                                               
opined  that  the paradigm  should  be  one  in which  the  major                                                               
companies hand off their big  finds in order that the independent                                                               
companies exploit it.                                                                                                           
                                                                                                                                
3:54:41 PM                                                                                                                    
                                                                                                                                
MR.  WALKER acknowledged  Alaska's huge  resource base,  which is                                                               
yet to  be exploited.   BP's conviction  that Alaska  needs major                                                               
oil companies  is due  to the  scale of  the investments  and the                                                               
technological challenge,  in order to fully  exploit the resource                                                               
base.  He  added that it's not to say  that the independent/small                                                               
companies are not  important.  They have a real  role to play and                                                               
will  do things  which BP  won't focus  on -  like exploring  for                                                               
these small  [oil] fields  which are  yet to  be discovered.   In                                                               
further response to  Representative Croft, he relayed  that BP is                                                               
on the  verge of  some major  investments.   He said,  "You could                                                               
almost say the  basin is going to recreate itself  on the back of                                                               
viscous oil and gas."   He noted that the normal  life cycle of a                                                               
basin is not "playing out" on the North Slope.                                                                                  
                                                                                                                                
3:56:18 PM                                                                                                                    
                                                                                                                                
MR. WALKER  mentioned that once  the [gas] pipeline is  built, it                                                               
will be BP's  intention to keep its  share of the pipe  full.  He                                                               
clarified that the  shaded portion of slide 5  represents the gas                                                               
it would take to fill up the pipeline.                                                                                          
                                                                                                                                
REPRESENTATIVE LEDOUX,  in regard BP  not making a profit  at $20                                                               
per barrel, asked  if [HB 488] was in effect,  at $20 per barrel,                                                               
whether the State of Alaska would receive any revenue.                                                                          
                                                                                                                                
MR. WALKER  replied that  under the current  system, at  low [oil                                                               
prices] BP  still pays royalty,  corporate income,  property, and                                                               
production taxes.  Therefore, at  low [oil] prices, BP still pays                                                               
considerable  revenues to  the State  of Alaska  and the  federal                                                               
government, regardless of whether it is making a profit.                                                                        
                                                                                                                                
REPRESENTATIVE LEDOUX  asked, "What about  under this new  PPT at                                                               
$20 per barrel?"                                                                                                                
                                                                                                                                
MR.  WALKER answered  that at  $20 per  barrel, BP  would make  a                                                               
small profit.   The nature of that change is  that at low prices,                                                               
the State of  Alaska receives slightly less and BP  makes a small                                                               
profit,  estimated to  be approximately  5 percent  of the  total                                                               
take.   When the  legislature moves  from $20  per barrel  at the                                                               
status quo to the PPT, BP will actually make a small profit.                                                                    
                                                                                                                                
REPRESENTATIVE LEDOUX asked, "At $20  per barrel, is the State of                                                               
Alaska better off  under the current system, or  better off under                                                               
this new PPT?"                                                                                                                  
                                                                                                                                
MR. WALKER responded that at $20  per barrel, the State of Alaska                                                               
would get  more revenue  under the current  system.   He surmised                                                               
that a well-constructed profit-based tax  would be better for the                                                               
State  of Alaska  in the  long term  to stimulate  investment and                                                               
activity.                                                                                                                       
                                                                                                                                
3:58:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  commented that BP's graph  displayed 25/50                                                               
as the  crossover point at  which the  State of Alaska  is taking                                                               
more on  the production tax  side under  ELF than it  would under                                                               
PPT.   He  continued that  if the  legislature remained  at DOR's                                                               
long-time projection and with the  5-year clawback provision, the                                                               
State of  Alaska would  not only be  receiving less  [money], but                                                               
would actually be paying $170 million per year in tax credits.                                                                  
                                                                                                                                
3:59:45 PM                                                                                                                    
                                                                                                                                
CO-CHAIR RAMRAS  explained that BP  isn't allowed to  receive the                                                               
credit when the price of oil falls below $40 per barrel.                                                                        
                                                                                                                                
MR.  WALKER  confirmed that  Co-Chair  Ramras  is correct.    The                                                               
transition credit  wouldn't be available  until the price  of oil                                                               
was above [$40 per barrel].                                                                                                     
                                                                                                                                
REPRESENTATIVE  GATTO   inquired  as  to  whether   the  clawback                                                               
provision is  eliminated if  the price of  oil remains  above $40                                                               
per barrel for the next five years.                                                                                             
                                                                                                                                
MR. WALKER  explained that the  bill is  structure in a  way such                                                               
that if  the price  of oil  is above $40  per barrel,  on average                                                               
through  the  year, then  BP  will  receive  the benefit  of  the                                                               
transition credit.  If the price  of oil is below $40 per barrel,                                                               
then that  credit rolls  forward to  a future  year in  which the                                                               
price of oil is high.                                                                                                           
                                                                                                                                
CO-CHAIR RAMRAS suggested that BP  "rethink it" and added that it                                                               
reads poorly.                                                                                                                   
                                                                                                                                
4:01:11 PM                                                                                                                    
                                                                                                                                
MR.  WALKER  responded that  it  was  a  result of  a  negotiated                                                               
outcome.  BP's early proposals  to the administration didn't have                                                               
any transitions provisions in them  because the headline tax rate                                                               
was more reasonable  - 12.5 percent.  He continued  that BP faces                                                               
enormous challenges  in creating this future,  and attractive and                                                               
stable fiscal  terms are  key in making  this happen;  without it                                                               
BP's vision will not come true.                                                                                                 
                                                                                                                                
4:01:56 PM                                                                                                                    
                                                                                                                                
RAYMOND HALL,  Senior Tax Economist,  BP Group, opined  that when                                                               
fiscal regimes  are being  compared, it's  important to  focus on                                                               
the basin in context.  For  example, how mature the basin is, the                                                               
cost  structure that  prevails  in the  basin,  what the  geology                                                               
looks like, how big and  risky the prospects are, whether there's                                                               
infrastructure in the basin, and how  close it is to markets.  He                                                               
remarked that  as a  general rule, one  can make  the observation                                                               
that a high tax burden  will generally equate to lower investment                                                               
levels and conversely, a lower  tax rate will generally equate to                                                               
higher investment levels.   He relayed that BP is  looking to see                                                               
whether the  regime is equitable  for both the investors  and the                                                               
government.   BP is  also looking  to see  whether the  regime is                                                               
simple  to  understand  and  administer.    He  noted  that  most                                                               
countries don't score  very well on the simplicity  criteria.  He                                                               
said  that  Alaska has  a  fairly  complex "cocktail  of  taxes."                                                               
Removing ELF and replacing it with  the proposed PPT is a move in                                                               
the general direction of improved simplicity.                                                                                   
                                                                                                                                
4:07:04 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS,  in regard  to the  allocation of  overhead and                                                               
cost  recovery, asked,  "Do you  think that  we invite  a lot  of                                                               
litigation  down  the road?"    He  further  asked, "How  do  you                                                               
mitigate  that under  the  context of  you want  the  plan to  be                                                               
simple and understandable?"                                                                                                     
                                                                                                                                
4:07:44 PM                                                                                                                    
                                                                                                                                
MR. WILLIAMS replied that one of  the things that mitigates it is                                                               
that the  wheel has already  been invented in  this area.   BP is                                                               
the operator of Prudhoe Bay  and incurs expenditures on behalf of                                                               
itself and its  partners operating the unit.  BP  bills those out                                                               
to its partners  and doesn't have a license from  its partners to                                                               
spend  their money.   Things  like that  don't show  up in  those                                                               
joint  venture billings  to  BP's  partners.   There's  a set  of                                                               
accounting rules which have been  agreed upon for the Prudhoe Bay                                                               
operating unit  regarding what  goes in  and out.   He  said this                                                               
legislation allows flexibility for DOR to examine those rules.                                                                  
                                                                                                                                
CO-CHAIR  SAMUELS inquired  as  to whether  the  State of  Alaska                                                               
would be able to access those audits.                                                                                           
                                                                                                                                
MR.  WILLIAMS explained  that the  legislation  grants [DOR]  the                                                               
authority to ensure that the  audit system is as it's represented                                                               
among the  partners, and also is  working as it's intended.   The                                                               
[DOR] also  has the  authority to deal  with situations  in which                                                               
there may be partners, but  they're not substantial enough for it                                                               
to be in their economic interest to incur the cost of an audit.                                                                 
                                                                                                                                
4:11:43 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  relayed that he's  been approached by  some who                                                               
want to have  more in statute and  some who want to  have more in                                                               
regulation.   He asked, "What  would be your  view as far  as the                                                               
rules on cost and overhead allocation?"                                                                                         
                                                                                                                                
MR.  WILLIAMS informed  the committee  that  there are  operating                                                               
agreements.    He mentioned  that  there's  also the  Council  of                                                               
Petroleum  Accountants  Societies  (COPAS),  which is  a  set  of                                                               
accounting principles for billing between partners.                                                                             
                                                                                                                                
4:13:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS expressed his  concern regarding the possibility                                                               
of COPAS  in statute, and  if/when the [principles]  are changed,                                                               
[the legislature] would have to return to the process yet again.                                                                
                                                                                                                                
MR. WILLIAMS relayed  that the objective is as  much certainty as                                                               
possible in order  that the tax functions as the  State of Alaska                                                               
expects, and  the industry is aware  of what it owes  and is able                                                               
to calculate  it correctly.   He remarked  that the  problem with                                                               
being simple  is that this is  a tax of general  application.  He                                                               
noted that this is aiming to attract new [investors] to Alaska.                                                                 
                                                                                                                                
REPRESENTATIVE   BERKOWITZ  mentioned   that  [the   legislature]                                                               
immediately assumed  that it had  to go in  a PPT direction.   He                                                               
further  mentioned that  he hasn't  heard much  discussion as  to                                                               
whether that's  the only  course the  legislature could  take, or                                                               
whether there  are better  courses.  He  asked, "Do  increases in                                                               
the corporate income tax make sense?  Are there other options?"                                                                 
                                                                                                                                
4:16:01 PM                                                                                                                    
                                                                                                                                
MR.  WALKER  responded  that  there are  a  number  of  different                                                               
options  that  [the  legislature]  could  look  at  in  terms  of                                                               
changing [the State  of Alaska's] fiscal regime.   He opined that                                                               
the key  issue is how  to stimulate investment on  Alaska's North                                                               
Slope to  mitigate the  historical decline.   He added  that PPT,                                                               
with  the structure  that was  presented  by the  administration,                                                               
could work very well for Alaska  over the long term, granted [the                                                               
legislature] "gets  the numbers right."   He said, "It's  a well-                                                               
considered  proposal, it's  a  well-considered  structure and  we                                                               
believe it would work, provided that the numbers are right."                                                                    
                                                                                                                                
REPRESENTATIVE GARA mentioned that BP  has chosen to compare [the                                                               
State  of Alaska]  to one  regime that  taxes at  a higher  rate,                                                               
Norway, and  four regimes that tax  at a lower rate.   He relayed                                                               
his understanding  that most places with  substantial reserves of                                                               
oil have a 60 percent or higher  tax rate.  He asked for examples                                                               
of  "bigger oil-producing  places" which  have a  higher than  60                                                               
percent rate.   He  further asked,  "Can you  tell us  why you've                                                               
chosen not to compare Alaska to the places with higher taxes?"                                                                  
                                                                                                                                
4:18:16 PM                                                                                                                    
                                                                                                                                
MR. HALL  explained that his  presentation is based  on comparing                                                               
tax and royalty regimes in which  the basin is at a similar stage                                                               
in  its life  cycle.   He  note that  Alaska started  out in  the                                                               
1970s, similar  to Norway and the  U.K.  To that  extent, [Norway                                                               
and the U.K.]  are comparable and all three of  these basins have                                                               
already  entered a  decline, a  mature phase.   He  further noted                                                               
that   a  production-sharing   contract   regime  has   different                                                               
dynamics.  For  example, the overall level of take  is quite low,                                                               
and a lot  lower than Alaska.  Conversely, at  high [oil] prices,                                                               
the  take  may  well  be  higher.   He  mentioned  other  factors                                                               
including the cost structure and the size of the resource.                                                                      
                                                                                                                                
4:19:42 PM                                                                                                                    
                                                                                                                                
MR.  WALKER added  that  BP  was conscious  of  Pedro van  Meurs'                                                               
report  as he  chose  Norway and  the U.K.  as  the two  boundary                                                               
conditions for  his analysis.   He  opined that  it's appropriate                                                               
that BP focuses on the same regimes.                                                                                            
                                                                                                                                
REPRESENTATIVE GARA  expressed his concern  regarding comparisons                                                               
being made  to places  in which  the taxes are  lower and  not to                                                               
places  in which  the  taxes are  higher.   He  opined that  it's                                                               
creating  the impression  that [the  legislature]  is adopting  a                                                               
very high tax, rather than adopting  a very low tax in comparison                                                               
to many other places [the committee] is not discussing.                                                                         
                                                                                                                                
MR. WALKER  replied that  it's certainly  BP's opinion  that [the                                                               
legislature]  is adopting  a high  tax for  the resources  on the                                                               
Alaska North Slope.                                                                                                             
                                                                                                                                
4:21:06 PM                                                                                                                    
                                                                                                                                
MR. HALL  discussed the  principles of  a fiscal  regime designed                                                               
for profit,  in which the  preference is  to see taxes  levied on                                                               
profits, rather  than on revenues.   He mentioned the  changes BP                                                               
has seen in a number of  mature basins, in which taxing has moved                                                               
away  from   revenues/royalties  to  exclusively  profits.     He                                                               
remarked  that   competitive  is  probably  the   most  important                                                               
attribute.   In designing a  fiscal regime, one must  ensure that                                                               
the regime reflects  the realities of the basin  including:  cost                                                               
structure,  level of  maturity, what  the exploration  resembles,                                                               
whether one is able to make  discoveries and whether they will be                                                               
small, whether  it's high  or low risk,  whether it  requires new                                                               
technology  or   whether  it  can   be  done   with  conventional                                                               
technology.   Therefore, there's  a whole  range of  factors that                                                               
need  to  be  considered  in   assessing  whether  the  basin  is                                                               
competitive.   He  noted  that there  are  hundreds of  different                                                               
fiscal  regimes around  the  world  and there  is  no one  regime                                                               
that's best for all circumstances.                                                                                              
                                                                                                                                
4:22:49 PM                                                                                                                    
                                                                                                                                
MR. HALL  explained a chart which  ranks the leading oil  and gas                                                               
producers around  the world in 2004.   The U.S. is  number two in                                                               
the world,  while Norway is  number six,  and the U.K.  is number                                                               
nine.   Therefore, these  are very important  basins in  terms of                                                               
production of both  oil and gas.   He noted that the  Lower 48 is                                                               
still a massive producing province on  a global basis.  In regard                                                               
to  the  marginal tax  rates  which  apply  in these  basins,  he                                                               
informed the  committee that there is  a marginal tax rate  of 45                                                               
percent in the Gulf of Mexico and 50 percent in the U.K.                                                                        
                                                                                                                                
4:24:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARA  expressed his understanding that  in some of                                                               
these  countries, the  oil is  privately  owned and  one pays  an                                                               
additional  portion to  the private  owner.   He asked,  "For the                                                               
countries where  the oil is  privately owned and you're  making a                                                               
private payment, is that included in the rate?"                                                                                 
                                                                                                                                
MR.  HALL replied  that it's  included in  the rate,  but there's                                                               
virtually  no privately-owned  petroleum in  the U.K.  or Norway.                                                               
He said that  under the current ELF regime, Alaska's  tax rate is                                                               
56 percent, and  the proposed PPT would increase its  tax rate to                                                               
61 percent.   Norway's tax rate  is 78 percent.   He relayed that                                                               
the manner in which capital  is treated and depreciation operates                                                               
also  needs to  be  considered.   For  example,  in  the U.K.,  a                                                               
company receives  100 percent  relief from  its investment  as it                                                               
spends it.   For a new project  in the U.K., a  company won't pay                                                               
any  tax  until   that  project  has  achieved   payback  on  the                                                               
investment.  He noted that Norway provides uplift of 30 percent.                                                                
                                                                                                                                
REPRESENTATIVE   BERKOWITZ  expressed   his  understanding   that                                                               
production rates in  the U.K. and Norway are  in decline, despite                                                               
these  massive  incentives  for   investment.    He  opined  that                                                               
incentives  for large-scale  projects are  of minimal  utility in                                                               
creating investment.                                                                                                            
                                                                                                                                
MR.  HALL relayed  that in  his experience,  the simplest  way to                                                               
incentivize  investment is  by  means  of a  low  tax  rate.   He                                                               
commented  that a  low headline  tax rate  predominantly attracts                                                               
investment.   He  noted that  there has  been a  trend in  mature                                                               
basins away  from taxes on  revenues to  taxes on profits.   When                                                               
the U.K.  started in the 1960s,  there was a royalty  with a rate                                                               
of  12.5 percent  which  applied  to all  production.   That  was                                                               
progressively abolished for new developments  in 1983 and for all                                                               
developments in 2003.   Similarly in Norway, there  was a royalty                                                               
rate ranging  from 8 to 16  percent.  That was  abolished for new                                                               
developments in 1986, on all gas  production in 1992, and will be                                                               
phased  out for  all oil  fields by  the end  of this  year.   He                                                               
mentioned  that  there  are  provisions to  exempt  the  Gulf  of                                                               
Mexico's production  in deep water  from royalty.  It  applies up                                                               
to the first 88 million barrels of cumulative production.                                                                       
                                                                                                                                
4:29:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   BERKOWITZ,  referring   to  recent   controversy                                                               
regarding  short payment  of  royalties in  the  Lower 48,  asked                                                               
whether that would affect these numbers.                                                                                        
                                                                                                                                
REPRESENTATIVE  GARA  asked,  "Aren't these  places  that  you're                                                               
comparing us to much more mature than Alaska is?"                                                                               
                                                                                                                                
MR.  HALL contended  that they'd  straddle Alaska.   He  remarked                                                               
that  Norway is  probably significantly  less mature  than Alaska                                                               
and the  U.K. is at  an equivalent state  of maturity.   There is                                                               
still  significant offshore  exploration  potential  left in  the                                                               
U.K., on the order of 9  billion BOE.  In Norway, the exploration                                                               
potential is significantly greater than  that, on the order of 20                                                               
billion BOE.  He noted that  there are large parts of Norway that                                                               
are yet to be explored.                                                                                                         
                                                                                                                                
4:31:17 PM                                                                                                                    
                                                                                                                                
MR. HALL,  in regard  to the  U.K. production  profile, explained                                                               
that there  was an initial peak  in the early 1980s,  followed by                                                               
decline and  a second peak  in the  1990s.  Government  policy in                                                               
the U.K.  has always been  focused on  trying to ensure  that the                                                               
basin is  self-sufficient - all  the requirements to  consume oil                                                               
and gas are met by domestic  consumption.  The real challenge the                                                               
basin  currently faces  is that  it's likely  that the  U.K. will                                                               
become a major  importer of oil and  gas in the years  ahead.  He                                                               
relayed  that  the  overall  direction  of  policy  has  been  to                                                               
maximize recovery  and encourage exploration and  as many players                                                               
into  the basin  as possible.   He  noted that  the U.K.  has 142                                                               
licensees.   The  resource ownership  is spread  amongst a  large                                                               
number of players.                                                                                                              
                                                                                                                                
4:33:08 PM                                                                                                                    
                                                                                                                                
MR.  HALL  stated that  the  U.K.  has  been very  successful  in                                                               
attracting exploration activity.   During the mid  to late 1990s,                                                               
there were  more exploration and  appraisal dollars spent  in the                                                               
U.K.  than virtually  any  other  basin in  the  world.   It  has                                                               
subsequently fallen due  in part to a tax increase  in 2002.  The                                                               
U.K. attracts  a disproportionate amount of  exploration activity                                                               
"on the  back of"  an attractive  and appropriate  fiscal regime.                                                               
He explained that  there was a very significant  fiscal reform in                                                               
1993, which  reduced the marginal  tax rate from an  excessive 80                                                               
percent to 30 percent, enduring  for approximately 10 years.  For                                                               
that 10-year  period, the  tax regime for  oil and  gas producers                                                               
was exactly  the same  as the  tax regime for  any other  part of                                                               
British  industry.   He  stated that  this tax  regime  led to  a                                                               
dramatic increase in investment in the basin and production.                                                                    
                                                                                                                                
4:35:19 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  observed that  the upper trend  started earlier                                                               
and asked whether there were other factors involved.                                                                            
                                                                                                                                
MR.  HALL responded  that it's  very  difficult to  say what  the                                                               
evolution  of the  production would  have  been had  the tax  not                                                               
changed, but there's a great  deal of anecdotal evidence from the                                                               
major producers  and the new  entrants that came into  the basin,                                                               
citing the  tax change as  the principle enabling  factor leading                                                               
to their dramatic increase in investment in the basin.                                                                          
                                                                                                                                
4:37:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS   asked  whether  the  U.K.,   in  addition  to                                                               
decreasing  the tax  rate, provided  incentives in  the five-year                                                               
period between 1989 and 1994.                                                                                                   
                                                                                                                                
MR.  HALL  responded that  when  this  change occurred  in  1993,                                                               
essentially  all incentives  were swept  away for  new investment                                                               
and projects.   It was the  tax regime that applied  to any other                                                               
industry.                                                                                                                       
                                                                                                                                
CO-CHAIR  SAMUELS  remarked that  in  PPT,  [the legislature]  is                                                               
examining the  tradable tax credits.   He  noted that as  the tax                                                               
rate dropped in the U.K., it also had incentives.                                                                               
                                                                                                                                
4:38:22 PM                                                                                                                    
                                                                                                                                
MR. HALL  responded that for  a new entrant  in the basin  in the                                                               
U.K. in  the 1990s, there  were no specific incentives  that came                                                               
along without investment.   There was simply a very  low tax rate                                                               
of 30 percent.                                                                                                                  
                                                                                                                                
REPRESENTATIVE  BERKOWITZ  inquired  as   to  whether  there  was                                                               
anything  else  happening in  the  early  1990s that  would  have                                                               
affected exploration and production.                                                                                            
                                                                                                                                
MR.  HALL  responded  that  there was  a  continuous  profile  of                                                               
activity.  He  noted that there was the Piper  Alpher disaster in                                                               
the  North Sea  in  1988, which  led to  a  significant focus  on                                                               
safety.  As  a result, the focus on new  developments was diluted                                                               
during that time period.                                                                                                        
                                                                                                                                
4:39:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ  asked, "If you  were to draw  that line                                                               
backwards prior to 1985, would the  slope of the line, aside from                                                               
that  dip  that  happened  as   a  result  of  the  environmental                                                               
problems, would that  be more linear?"  He surmised  that the dip                                                               
at that point  was a deviation from where events  would have gone                                                               
and that there was a factor that brought the production down.                                                                   
                                                                                                                                
MR. HALL  replied that  one very important  factor is  oil price.                                                               
He said, "If we go back in real  terms in 1980, the oil price was                                                               
significantly higher than it is now.   In real terms the price in                                                               
1980/1981 was about  $90 in today's money."  He  noted that there                                                               
was a catastrophic collapse in the  oil price in 1986, falling to                                                               
$10 [per barrel]  in nominal terms.  That huge  change in the oil                                                               
price, in the span of  about 18 months, transformed the economics                                                               
overnight -  there was a  worldwide crisis  in the industry.   He                                                               
added that  a lot of  investments which were  previously economic                                                               
when  the oil  price was  $90  [per barrel],  overnight, were  no                                                               
longer economic.                                                                                                                
                                                                                                                                
4:41:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked,  "Of the factors that  led to the                                                               
increase   in  production,   which  would   you  weigh   as  more                                                               
significant:   the increase in  market price or the  reduction in                                                               
the tax rates?"                                                                                                                 
                                                                                                                                
MR.  HALL contended  that it's  comprehensively the  reduction in                                                               
the tax rate.                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARA  said he'd  much  rather  have long,  stable                                                               
production at  a high  tax rate than  short-term production  at a                                                               
low tax rate with nothing left in  20 years.  He surmised that if                                                               
[the U.K.]  kept the  rate at 80  percent, production  would have                                                               
increased slightly, remained  level, and lasted much  longer.  He                                                               
further surmised that [the U.K.]  reduced [the marginal tax rate]                                                               
to 30 percent and  produced all of its oil in a  span of 15 years                                                               
and all of a  sudden, it declined in 2005.  He  asked, "Is that a                                                               
possibility of what happened - you  spent all of your oil because                                                               
you attracted it at a low tax rate?"                                                                                            
                                                                                                                                
MR.  HALL disagreed.    He explained  that  since the  production                                                               
peaked, a lot of the major  operators are finding that the fields                                                               
in  production, as  they mature,  are beginning  to decline  much                                                               
faster than  anticipated.   He noted  that there  was also  a tax                                                               
increase in 2002,  which led to a reduction  in investment, which                                                               
also had an  impact on the subsequent evolution  of production in                                                               
the basin.   This is what happened to the  government tax revenue                                                               
from the  oil and gas  industry over a  similar period.   The tax                                                               
change occurred in 1993 and  subsequently, the tax yield from the                                                               
basin increased.  For example, in  2001, the overall tax yield in                                                               
the basin  was five times  what it was  in 1991, even  though the                                                               
oil  price was  broadly  the  same in  real  terms.   He  further                                                               
explained that it's an example  of a government cutting taxes and                                                               
tax rates and  encouraging investment and activity,  which led to                                                               
higher production, which  gave the government more tax.   He said                                                               
that this  is a classic  example of  how cutting tax  can benefit                                                               
all of the parties engaged in the industry.                                                                                     
                                                                                                                                
4:45:20 PM                                                                                                                    
                                                                                                                                
MR.  HALL  contended  that the  differences  between  Norway  and                                                               
Alaska are much greater than the  similarities.  Eleven of the 14                                                               
largest fields in the North Sea  are in Norway.  These fields are                                                               
of   very   high   quality   and   have   very   good   reservoir                                                               
characteristics.    He  noted  that the  Statfjord  field  has  a                                                               
recovery factor of  70 percent.  He further noted  that Norway is                                                               
very  close to  the major  markets in  Europe.   Norway's overall                                                               
production  is still  growing, although  oil production  has been                                                               
declining for  the last  3-4 years.   However, gas  production is                                                               
still  rising  very  dramatically.   He  surmised  that  Norway's                                                               
production will continue  to increase for another 3-4  years.  He                                                               
noted  that the  state plays  a very  significant role  in Norway                                                               
through  its  ownership  of  resources.     The  Norwegian  state                                                               
directly  owns one  third of  the resources  in existing  fields.                                                               
There are two major Norwegian  companies, which have a very large                                                               
state  ownership -  Statoil, which  is  70 percent  owned by  the                                                               
Norwegian state and until 2000,  was 100 percent owned; and Norsk                                                               
Hydro, which  is 44  percent owned  by the  Norwegian state.   He                                                               
relayed  that   this  is   important  in   the  context   of  the                                                               
implementation of  policy.  When  the state  owns so much  of the                                                               
resource  base, directly  or indirectly  through  its agents,  it                                                               
tends to own a  lot of the prime acreage, operate  all of the key                                                               
fields,  and  make  most  of  the  key  decisions,  which  effect                                                               
development of the basin.  He  said it's easier to sustain a high                                                               
tax rate  when the majority  of the participants paying  that tax                                                               
are government.   This largely explains why Norway  has been able                                                               
to hold its tax  rate at the level it has - the  state has such a                                                               
strong role  in the basin.   The international oil  companies own                                                               
about one third  of the resource base in Norway.   However, there                                                               
is no state company or state-owned company in the U.K.                                                                          
                                                                                                                                
4:49:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG inquired  as to  the amount  the British                                                               
government, as well as the royal family, own of BP.                                                                             
                                                                                                                                
MR. HALL  answered that the  British government doesn't  have any                                                               
ownership  in   BP.    In  further   response  to  Representative                                                               
Rokeberg,  he  relayed that  there's  a  history of  the  British                                                               
government  having a  large  stake in  BP.   He  opined that  the                                                               
government's remaining  stake in BP  was diluted in the  1980s so                                                               
it got rid of its remaining stake in BP in the 1980s.                                                                           
                                                                                                                                
REPRESENTATIVE  SEATON asked,  "What difference  does it  make to                                                               
the  profitability  or the  investment  by  an international  oil                                                               
company that two  thirds of the oil in those  basins are owned by                                                               
another state or  a different oil company?"  He  remarked that if                                                               
they're willing to pay those  tax rates and develop those fields,                                                               
he would presume that if it  wasn't a profitable venture for them                                                               
and they  wanted to participate,  Statoil and Norway  State would                                                               
be developing all of the oil there.                                                                                             
                                                                                                                                
4:51:32 PM                                                                                                                    
                                                                                                                                
MR. HALL  said the big  difference between the perspective  of an                                                               
independent   company  and   a  government   investing  is   that                                                               
governments tend to have much  lower cost of capital.  Therefore,                                                               
[governments] are able to afford projects that companies can't.                                                                 
                                                                                                                                
REPRESENTATIVE  SEATON added  that if  there's some  relationship                                                               
that  changes,   the  international   oil  companies   are  still                                                               
participating at that tax rate in those fields.                                                                                 
                                                                                                                                
MR. HALL said the companies that  are in Norway are there because                                                               
they like the quality of the  opportunities.  One can gain access                                                               
to some very  large, high quality fields and reserves.   He noted                                                               
that  there  are relatively  few  foreign  companies involved  in                                                               
Norway and  there are only  34 foreign licensees.   The Norwegian                                                               
government  is   taking  significant  steps  to   encourage  more                                                               
companies  to  enter  the  basin.     For  example,  it  recently                                                               
announced an exploration  incentive about 18 months ago.   If one                                                               
is not  paying tax in  Norway and  is a new  company/new entrant,                                                               
spending  $100 on  exploration in  a given  year, the  government                                                               
will reimburse  $78 at the  end of that  year.  He  remarked that                                                               
the exploration drilling  density on the U.K. side  of the median                                                               
line  in  the  North  Sea looks  completely  different  from  the                                                               
corresponding  exploration  drilling  density  on  the  Norwegian                                                               
side.  He  reiterated that there has been a  very low exploration                                                               
density  in   Norway  and  the   government  is   concerned  with                                                               
attracting more  exploration activity  into the  basin.   He said                                                               
the view across  the industry is that  [the Norwegian government]                                                               
will continue to  struggle to attract new companies,  even with a                                                               
tax of  78 percent;  one can  make more  money elsewhere  for the                                                               
same investment.                                                                                                                
                                                                                                                                
4:54:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG surmised, "Is  that not why the Norwegian                                                               
government spun  off their interest  in Norse Hydro  and Statoil,                                                               
which are  now two publicly  traded companies, so  [the Norwegian                                                               
government] could generate more private sector participation?"                                                                  
                                                                                                                                
MR.  HALL surmised  that the  Norwegian government  is trying  to                                                               
make  Statoil,  in  particular, act  like  an  international  oil                                                               
company.  In addition to  developing resources in Norway, Statoil                                                               
now has a very active  international investment program.  Statoil                                                               
is  diversifying  and  trying  to   create  a  company  which  is                                                               
comparable to all other international oil and gas companies.                                                                    
                                                                                                                                
MR. WALKER  added that Norway  can afford  to charge such  a high                                                               
marginal tax  rate because  it has  the resources  that companies                                                               
are still  willing to  invest in.   Norway  has been  growing its                                                               
production  for   30  years.    Oppositely,   [Alaska]  has  been                                                               
declining for 15-17 years at  6 percent, and the investment isn't                                                               
flowing to  Alaska to stem that  decline.  He said,  "To envy the                                                               
tax rate of  a country with such high quality  resources, I would                                                               
offer to you would be a dangerous thing to do."                                                                                 
                                                                                                                                
REPRESENTATIVE  LEDOUX   inquired  as  to  whether   BP  had  the                                                               
opportunity, when Norway was instituting  its taxes, to negotiate                                                               
with or  speak to the  Norwegian government,  and if so,  what BP                                                               
told it about its tax structure.                                                                                                
                                                                                                                                
4:56:40 PM                                                                                                                    
                                                                                                                                
MR. HALL relayed  that in recent years, there have  been a number                                                               
of efforts  made by  the industry  to engage  in dialog  with the                                                               
Norwegian government to  convince them to reform  its tax system,                                                               
encourage more investment, and encourage  more companies to enter                                                               
into the basin.   The Norwegian governor has yet  to respond.  He                                                               
said Norway  is a small  country, with  a small population  and a                                                               
fantastic  resource base,  unlike  the U.K.,  which  has a  large                                                               
population  and is  consuming  most of  what  has been  produced.                                                               
Norway is able  to export nearly all of that  production and earn                                                               
a fabulous amount  of income from doing so.   Therefore, [Norway]                                                               
hasn't seen the same pressures that the U.K. faces.                                                                             
                                                                                                                                
REPRESENTATIVE LEDOUX asked if BP  has been telling the Norwegian                                                               
government the  same thing it  has been  telling the Alaska  - if                                                               
its taxes remain high, it's going to discourage investment.                                                                     
                                                                                                                                
MR. HALL  confirmed yes and  added that the figures  support that                                                               
on  exploration.   He  reiterated  that the  U.K.  has been  very                                                               
successful  in  attracting  exploration funds.    Throughout  the                                                               
1990s,  there was  more exploration  and appraisal  investment in                                                               
the U.K.  than in  virtually any  other basin in  the world.   In                                                               
contrast, the  investment in Norway  has been much lower.   There                                                               
was only  one large  discovery in Norway  during that  period and                                                               
outside that discovery,  there hasn't been much  success.  Hence,                                                               
the  Norwegian government  is now  very much  actively addressing                                                               
the  need to  encourage more  exploration activity.   He  relayed                                                               
that [Norway]  is still  focusing on incentives  in hope  that it                                                               
doesn't have to  adjust the headline tax rate.   He surmised that                                                               
Norway  will struggle  to attract  more exploration  dollars into                                                               
the country until it addresses the headline tax rate.                                                                           
                                                                                                                                
4:59:08 PM                                                                                                                    
                                                                                                                                
MR. HALL discussed the deepwater  province of the Gulf of Mexico.                                                               
During  the period  of  1993-2004,  the Gulf  of  Mexico had  the                                                               
highest level  of exploration  and appraisals of  any basin.   He                                                               
noted that [BP] has been  very successful in discovering reserves                                                               
[in the Gulf  of Mexico], which had the second  highest volume of                                                               
discovered reserves  during that period.   The aforementioned has                                                               
translated into  very rapid  growth in production.   In  the mid-                                                               
1990s,   [BP's]  production   [in   the  Gulf   of  Mexico]   was                                                               
approximately  200,000 barrels  per day.   [BP's  production] has                                                               
already increased  to approximately  1.5 million barrels  per day                                                               
and is projected  to be 2.5 million barrels per  day within a few                                                               
years.  He explained that the  fiscal regime has played a part in                                                               
bringing this about.   The tax rate  in the Gulf of  Mexico is 45                                                               
percent  at  its highest.    If  one receives  deepwater  royalty                                                               
relief, [the tax rate] is about  35 percent.  He stated that [the                                                               
Gulf of  Mexico] is an  example of a  low tax environment  in the                                                               
U.S.,  which has  been very  successful at  attracting investment                                                               
and exploration dollars and translating that into production.                                                                   
                                                                                                                                
MR. HALL said [the Gulf of  Mexico] isn't an easy environment and                                                               
BP  is using  some very  challenging technology.   He  said water                                                               
depths are  absolutely phenomenal.   BP  has developed  fields in                                                               
excess of  2,000 meters  of water  with cutting  edge technology.                                                               
He opined  that this is  very important to  the U.S. in  order to                                                               
boost  domestic  production and  in  the  context of  the  global                                                               
concern  regarding  energy  security.   He  described  it  as  an                                                               
example  of a  low/stable tax  involvement encouraging  activity.                                                               
He discussed  heavy oil  in Alberta, Canada,  and stated  that in                                                               
the mid-1990s  investment was  fairly modest in  this basin.   It                                                               
significantly  increased,  and  by  2005 the  investment  was  $7                                                               
billion in one  year.  The prediction is for  that to increase to                                                               
nearly $10 billion  in a few years.  He  noted that investment in                                                               
Alaska is approximately  $1-$1.5 billion.  He  explained that oil                                                               
price has  had an  impact, but that  it's important  to highlight                                                               
the  very   key  fiscal  reform  that   the  Canadian  government                                                               
introduced in  the mid-1990s.   Essentially,  the way  the regime                                                               
works is  that the royalty rate  is 1 percent until  that project                                                               
has  secured  payout.    That   payout  calculation  includes  an                                                               
allowance for a  risk-free rate of return.  In  addition to that,                                                               
one  will   pay  the  federal   and  state  taxes,   which  total                                                               
approximately  39  percent.    In  regard  to  post-payouts,  the                                                               
royalty rate is  increased to 25 percent.  He  explained that the                                                               
marginal tax  rate on this heavy  oil production is at  a maximum                                                               
of 39 percent pre-payout, and at a maximum of 54 percent post-                                                                  
payout.   He  added that  it needs  to be  recognized that  there                                                               
already are  phased reductions  in federal  tax in  Canada, which                                                               
will reduce  both of  those rates by  approximately 4  percent by                                                               
2007.   Thus, if  one invests in  heavy oil in  Canada, in  a few                                                               
years the pre-payout will be  approximately 35 percent, and post-                                                               
payout will be approximately 50 percent.                                                                                        
                                                                                                                                
5:04:25 PM                                                                                                                    
                                                                                                                                
MR. HALL  continued that this  is leading  to a huge  increase in                                                               
activity,  both  in  investment  and in  production.    By  2010,                                                               
production from  the heavy  oil province  in Alberta,  Canada, is                                                               
expected to reach approximately 2 million barrels per day.                                                                      
                                                                                                                                
REPRESENTATIVE  GARA,  in regard  to  the  50 percent  tax  rate,                                                               
inquired as to whether that's exclusively for heavy oil.                                                                        
                                                                                                                                
MR. HALL  confirmed yes; that  is a regime which  is specifically                                                               
designed to encourage heavy oil.                                                                                                
                                                                                                                                
5:05:25 PM                                                                                                                    
                                                                                                                                
MR. HALL  discussed various  fiscal regimes  in North  America in                                                               
comparison to Alaska under the  current ELF and the proposed PPT.                                                               
Marginal tax  rates include:   39 percent pre-payout  in Alberta;                                                               
45  percent in  Gulf  of  Mexico deepwater;  low  50s percent  in                                                               
Colorado,  Wyoming,  Texas,  Oklahoma,  and  California;  and  61                                                               
percent  [under  the proposed  PPT]  in  Alaska [compared  to  56                                                               
percent under  the ELF].   He concluded that in  comparing fiscal                                                               
regimes,  one needs  to go  beyond just  looking at  headline tax                                                               
rate by  looking at the  context of  the basin.   He acknowledged                                                               
the clear relationship between the  fiscal policy and the overall                                                               
level  of basin  activity.   A higher  tax burden  will generally                                                               
lead to less investment, while  a lower tax burden will encourage                                                               
investment -  as demonstrated  by the U.K.,  Gulf of  Mexico, and                                                               
Alberta.   He said one of  the risks that might  emerge is Alaska                                                               
being perceived  as having the highest  tax rate as well  as cost                                                               
structure in North America.   He surmised that those two elements                                                               
may make  it difficult  for Alaska to  attract the  investment it                                                               
needs to ensure that its potential is fully developed.                                                                          
                                                                                                                                
5:08:09 PM                                                                                                                    
                                                                                                                                
MR.  WALKER defined  government take  as the  ratio of  the total                                                               
taxes BP pays to  the total taxes plus the profit  it makes - the                                                               
government's  share  of  the  proceeds from  the  industry.    In                                                               
Alaska,  BP pays  a royalty,  production tax,  property tax,  and                                                               
income tax,  and in  addition, a  federal income  tax.   He noted                                                               
that some of  the Alaska taxes are deductible  for federal income                                                               
tax.  He  discussed a chart which displayed  the total government                                                               
take  at different  oil  prices for  both  the current  ELF-based                                                               
system  and PPT.   He  noted that  the status  quo, which  is the                                                               
current ELF-based  system is the  blue dashed line and  the 20/20                                                               
PPT is the green line.  At  low prices, BP doesn't make a profit.                                                               
He  mentioned  that  regardless,  BP continues  to  pay  royalty,                                                               
property  tax,  and   state  income  tax,  which   results  in  a                                                               
government take of greater than 100 percent.                                                                                    
                                                                                                                                
5:11:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ inquired as to  the number of barrels BP                                                               
produces in Alaska.                                                                                                             
                                                                                                                                
MR.  WALKER  answered  that  this year,  BP  expects  to  produce                                                               
approximately 262,000 barrels per day.   He noted that 262,000 is                                                               
BP's net  share and not all  of that goes down  TAPS because some                                                               
is used  as natural gas liquids  (NGLs) on the [North]  Slope for                                                               
injecting for  EOR, and BP moves  some gas over to  the Northstar                                                               
Unit for enhanced  oil recovery.  Therefore, the  sales volume is                                                               
probably closer to 250,000 barrels per day on average.                                                                          
                                                                                                                                
REPRESENTATIVE GARA stated  that according to the  DOR, which has                                                               
a model displaying corporate profits  at various [oil] prices, at                                                               
$20 per barrel, it's projected  that next year, North Slope [oil]                                                               
companies will make approximately $950  million in profit on $4.3                                                               
billion in  gross revenue, which  is a 20 percent  profit margin.                                                               
He added that BP is estimating something quite different.                                                                       
                                                                                                                                
5:13:34 PM                                                                                                                    
                                                                                                                                
MR. WALKER  clarified that  BP is discussing  profit in  the true                                                               
sense of  profit after  it has  deducted the  associated expenses                                                               
that accompany that profit.   He stated that BP's annual expenses                                                               
in Alaska total $1.1 billion.                                                                                                   
                                                                                                                                
5:14:31 PM                                                                                                                    
                                                                                                                                
MR. WALKER  explained that in  calculating its profit, BP  has to                                                               
[subtract]  all  of  the  expenses,  capital  costs  incurred  to                                                               
produce/develop  those barrels,  transportation costs  - the  net                                                               
cost of  flowing through  the pipeline as  well as  the shipping,                                                               
and the taxes it pays.                                                                                                          
                                                                                                                                
5:15:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ stated  that ConocoPhillips Alaska, Inc.                                                               
estimated its  total costs  as approximately  $10 per  barrel and                                                               
added that he can't imagine BP's cost differing significantly.                                                                  
                                                                                                                                
MR. WALKER reiterated that to  calculate the profit, one needs to                                                               
factor  in   the  total  cost,  operating   cost,  capital  cost,                                                               
transportation  cost,  tax  cost   of  royalty,  production  tax,                                                               
property tax, state income tax, and federal income tax.                                                                         
                                                                                                                                
5:16:13 PM                                                                                                                    
                                                                                                                                
MR.  WALKER continued  that  under PPT,  the  government take  is                                                               
approximately 70 percent at the  moderately high price of $30 per                                                               
barrel.   He described  this government  take as  very high.   At                                                               
current  oil  prices, the  government  take  is approximately  60                                                               
percent.   Under the [PPT]  regime, it would be  approximately 61                                                               
percent  at  $60 [per  barrel].    He  advocated that  it's  very                                                               
important that BP makes a  good, reasonable prices when the [oil]                                                               
prices are  high.  He said  that if [the legislature]  takes that                                                               
away, there's no reason to be in Alaska.                                                                                        
                                                                                                                                
5:17:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON surmised  that Mr.  Walker is  saying that                                                               
BP's investment  over time  on the  North Slope  is based  on the                                                               
anticipation that oil will be $50 or $60 per barrel.                                                                            
                                                                                                                                
MR.  WALKER replied  that BP  is  presenting the  reality of  its                                                               
business today,  with the kind  of costs  that it has  to produce                                                               
oil on the North Slope.   He said, "It's absolutely the case that                                                               
in Alaska  you have a  few good years,  as you look  back through                                                               
history, and  then you  have a  lot of years  where we've  made a                                                               
very marginal return."   He added that BP needs  those good years                                                               
to average out  [the bad years] and receive  a reasonable return.                                                               
He said Alaska  is a mature business with  a challenged resource.                                                               
In  BP's opinion,  [the legislature]  should  be concerned  about                                                               
overtaxing the industry, rather than under taxing it.                                                                           
                                                                                                                                
5:19:13 PM                                                                                                                    
                                                                                                                                
MR. WALKER discussed the impact of  moving from the status quo of                                                               
the ELF-based  system to PPT.   At $20  per barrel under  ELF, BP                                                               
doesn't make a  profit.  At $60 per barrel  under ELF, BP's share                                                               
is greater  than the State  of Alaska's  share, which is  how the                                                               
system is currently designed.                                                                                                   
                                                                                                                                
CO-CHAIR   RAMRAS,  in   regard  to   PPT,  remarked   that  [the                                                               
legislature]   has  the   opportunity,  if   it  handles   things                                                               
correctly, to be partners with the  oil companies in risk as well                                                               
as to reap the [benefit] during high cycles of oil prices.                                                                      
                                                                                                                                
5:21:08 PM                                                                                                                    
                                                                                                                                
MR. WALKER, in response to  Representative Rokeberg, informed the                                                               
committee that  BP has  investments all over  the world  and each                                                               
investment will  have a different  set of characteristics.   When                                                               
[oil] prices  are low  in Alaska,  BP is "making  a loss"  and is                                                               
being  carried by  other places  around  the world.   When  [oil]                                                               
prices  are high,  BP has  to  make a  good/reasonable profit  in                                                               
order to  make Alaska  attractive to  be in  BP's portfolio.   In                                                               
response to  Representative LeDoux, he explained  that the normal                                                               
convention  is  that   the  industry  makes  a   profit  and  the                                                               
government takes a share.  When  the government take is above 100                                                               
percent, the industry  profit is negative.   Therefore, the total                                                               
tax reduced by BP's loss is greater than 100 percent.                                                                           
                                                                                                                                
5:23:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARA  stated that  by DOR's  [calculations], there                                                               
is a  much greater corporate  share than  state share at  $40 and                                                               
$60 per barrel, even under PPT.                                                                                                 
                                                                                                                                
5:24:53 PM                                                                                                                    
                                                                                                                                
MR.  WALKER, in  regard to  the impact  on government  take under                                                               
PPT, noted that at $20 [per  barrel], BP would make a very modest                                                               
profit,  which he  acknowledged as  the impact  of introducing  a                                                               
profit-related tax.   At $60  [per barrel],  BP and the  State of                                                               
Alaska's  shares are  approximately equal.   He  stated that  the                                                               
overall impact of PPT and the  tax rates that have been chosen in                                                               
the bill is to "squeeze" BP's  profit from the status quo to PPT.                                                               
He said, "We're paying more tax, therefore we have less profit."                                                                
                                                                                                                                
5:26:09 PM                                                                                                                    
                                                                                                                                
MR. WALKER  discussed what the impact  of PPT would be  on future                                                               
investments.  He acknowledged that it's  true to say that in most                                                               
cases  the  rate  of  return   increases  with  the  PPT  system.                                                               
However,  rate of  return is  just  one economic  measure and  BP                                                               
considers  a suite  of economic  measures:   rate of  return, net                                                               
present  value,  and  total  cash  flow from  any  project.    He                                                               
remarked that  at the  end of  the day, BP  would be  paying more                                                               
tax, therefore  it would be making  less [of a profit].   Instead                                                               
of going to the investor, the money would be going to the state.                                                                
                                                                                                                                
MR.  WALKER said  decline  is  a problem.    Alaska  has been  in                                                               
decline because  profitability has  been insufficient  to attract                                                               
capital, not  due to a  lack of resources.   He noted  that large                                                               
increases in  investment are required.   To stem  ongoing decline                                                               
and  attract the  required investment  of  $50-$100 billion,  PPT                                                               
must work  for the  major investors.   He  noted that  capital is                                                               
mobile,  and international  investment flows  to basins  where it                                                               
can  earn  a profit.    He  opined  that profit-based  taxes  are                                                               
superior to revenue-based taxes.   He further opined that the PPT                                                               
structure has  merit and  could serve Alaska  well for  the long-                                                               
term.  He further noted  that higher taxes means less investment.                                                               
He opined that the 20 percent tax  rate is very high and will not                                                               
maximize investment and production on the Alaska North Slope.                                                                   
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked, "What rate would?"                                                                              
                                                                                                                                
MR. WALKER answered that it's very  difficult for BP to say which                                                               
one would, but certainly lower than 20 percent.                                                                                 
                                                                                                                                
REPRESENTATIVE  BERKOWITZ, in  response  to  BP's statement  that                                                               
[the 20  percent tax  rate] isn't  going to  maximize investment,                                                               
surmised  that there's  a  point  at which  BP  believes it  will                                                               
maximize investment.                                                                                                            
                                                                                                                                
MR. WALKER  said the  existing tax  regime is  attracting between                                                               
$1-$1.5 billion  to the North  Slope.   In order to  stem decline                                                               
and create  a future that  underpins gas, $2-$3 billion  needs to                                                               
be attracted to  the North Slope.  He commented  that the concept                                                               
of adding an  additional $1 billion of tax onto  the existing tax                                                               
bill goes against the notion of attracting more investment.                                                                     
                                                                                                                                
5:30:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ relayed  that some  of the  independent                                                               
[companies]  will  point  to  the  high  cost  of  transportation                                                               
through TAPS  and on BP,  ExxonMobil, and  ConocoPhillips tankers                                                               
as being a  significant barrier to entry.  He  noted that it goes                                                               
beyond  the  State  of  Alaska's  tax as  well  as  some  of  the                                                               
privately erected barriers to entry.                                                                                            
                                                                                                                                
MR. WALKER  agreed that small companies/independents  have a very                                                               
important role to  play.  He reiterated that the  majority of the                                                               
investment  is  going  to  have  to come  from  the  major  [oil]                                                               
companies.                                                                                                                      
                                                                                                                                
5:32:01 PM                                                                                                                    
                                                                                                                                
MR. WALKER noted that oil needs gas  and gas needs oil.  In order                                                               
for the gas  project to proceed and for the  gas [industry] to be                                                               
healthy,  it  needs   to  be  underpinned  with   a  healthy  oil                                                               
[industry].                                                                                                                     
                                                                                                                                
REPRESENTATIVE   GARA   requested  information   regarding   BP's                                                               
statement that it doesn't make a profit at $20 per barrel.                                                                      
                                                                                                                                
MR. WALKER  assured Representative Gara  that BP is  losing money                                                               
in Alaska at  $20 per barrel.   He noted that BP  has a portfolio                                                               
of assets and Alaska is only one of them.                                                                                       
                                                                                                                                
REPRESENTATIVE  GATTO commented  that  in order  to have  maximum                                                               
investment, the tax  [rate] needs to be reduced to  0 percent and                                                               
in addition, a bonus needs to be offered.                                                                                       
                                                                                                                                
5:33:59 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  RAMRAS asked,  "As good  corporate  citizens, how  much                                                               
does BP give back to the communities across the state annually?"                                                                
                                                                                                                                
MR.  WALKER answered  that  in  2005, BP  gave  $7.6 million  [to                                                               
Alaska].  He added that will be substantially higher in 2006.                                                                   
                                                                                                                                
CO-CHAIR SAMUELS  asked, "Do  you think  that all  royalty owners                                                               
should be treated the same under the law?"                                                                                      
                                                                                                                                
MR.   WILLIAMS  responded   that   the   private  royalties   are                                                               
problematic  because the  typical  royalty owner  doesn't bear  a                                                               
share of  the costs.   However,  the cost  of producing  oil from                                                               
that private  land reduces  the tax burden  for the  oil company.                                                               
He asked,  "How do you allocate  the benefit of those  costs?  Do                                                               
you allocate any benefit of  those costs to the royalty interest,                                                               
which isn't paying any of those  costs?"  He answered, "You could                                                               
say no, why  not have a flat-rate royalty, say  5 percent tax for                                                               
private royalties where the landowner  is the royalty collector."                                                               
Eventually, when  one gets to the  end of fuel life  or there are                                                               
low  oil prices  for  a  temporary period  of  time, the  working                                                               
interest owner, the oil company, may  have zero PPT.  At the same                                                               
time, the  royalty owner pays in  full because it's based  on the                                                               
gross  value of  the royalty.   On  the hand,  the royalty  owner                                                               
isn't paying any  tax.  He mentioned that  if the [legislature's]                                                               
goal is  to have the royalty  owners' share to be  the same under                                                               
the new  system as it  was under the  old [system], then  a tweak                                                               
needs to be  made to HB 488.   He stated that  the simplest thing                                                               
is to break it out as a separate rate for private royalties.                                                                    
                                                                                                                                
[HB 488 was held over]                                                                                                          

Document Name Date/Time Subjects